WASHINGTON, D.C. 20549
Commission File No. 1-6651
HILL-ROM HOLDINGS, INC.
The aggregate market value of the registrant’s voting common equity, held by non-affiliates of the registrant, was approximately $4.6$6.7 billion, based on the closing sales price of $70.60$100.60 per share as of March 31, 20172020 (the last business day of the registrant’s most recently completed second fiscal quarter). There is no non-voting common equity held by non-affiliates.
Documents incorporated by reference.
Certain portions of the registrant’s definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on March 6, 201810, 2021 are incorporated by reference into Part III of this Annual Report on Form 10-K.
HILL-ROM HOLDINGS, INC.
Hill-Rom Holdings, Inc. (the "Company," "Hill-Rom," "we," "us,"“Company,” “Hillrom,” “we,” “us,” or "our"“our”) was incorporated on August 7, 1969, in the State of Indiana and is headquartered in Chicago, Illinois. We are a leading global medical technology company with more thanleader whose approximately 10,000 employees worldwide. We partner with health care providers in more than 100 countries by focusing on patient care solutions that improve clinical and economic outcomes. Hill-Rom's people, products and programs work towards one mission: Every day, around the world, we enhancehave a single purpose: enhancing outcomes for patients and their caregivers.caregivers by Advancing Connected Care™. Around the world, our innovations touch over 7 million patients each day. Our products and services help enable earlier diagnosis and treatment, optimize surgical efficiency and accelerate patient recovery while simplifying clinical communication and shifting care closer to home. We make these outcomes possible through digital and connected care solutions and collaboration tools, including smart bed systems, patient monitoring and diagnostic technologies, respiratory health devices, advanced equipment for the surgical space and more, delivering actionable, real-time insights at the point of care.
•Surgical Solutions –globally providesenables peak procedural performance, connectivity and video integration products that improve surgicalcollaboration, workflow, safety and efficiency in the operating room, includingsuch as surgical video technologies, tables, lights, pendants, precision positioning devices and various other surgical products and accessories.
Net revenue, segment profitability and other measures of segment reporting for each reportingreportable segment are set forth in Note 1114. Segment Reporting of our Consolidated Financial Statements.Statements included under Part II, Item 8 of this Form 10-K.
Products and Services
Patient Support Systems. Our innovative patient supportPatient Support systems business include a variety of specialty frames and surfaces such(such as Medical Surgical ("Med-Surg")medical surgical beds, Intensive Care Unit ("ICU")intensive care unit beds, and Bariatricbariatric patient beds,beds), patient mobility solutions, (such as lifts and other devices used to safely move patients), non-invasive therapeutic products and surfaces, and our communicationsinformation technologies and software solutions.solutions in our Care Communications portfolio. These patient support systemsproducts are sold globally and can be designed for use in high, mid, and low acuity settings, depending on the specific design options, and are built to advance mobility, reduce patient falls and caregiver injuries, improve caregiver efficiency and prevent and care for pressure injuries. In addition, we also sell equipment service contracts for our capital equipment, primarily in the U.S.United States. Approximately 52%53%, 55%51% and 72%50% of our revenue duringin fiscal 2017, 20162020, 2019 and 2015, respectively,2018 was derived from this segment.
Front Line Care. Our Front Line Care products include our patient monitoring and diagnostics products from Welch Allyn Inc. ("Welch Allyn") and Mortara Instruments, Inc. ("Mortara") and our respiratory health products. Our patient monitoring and diagnostics products from Welch Allyn include blood pressure, physical assessment, vital signsproducts in each of the following four categories: patient exam and diagnostics, patient monitoring, diagnostic cardiopulmonary, diabetic
retinopathycardiology and vision screening and thermometry products. We also see exciting opportunities to integrate Welch Allyn and Mortara technologies and patient data in the care environment to further enhance our product offerings.diagnostics. Our respiratory health products include the Vest® System, VitalCough® System, MetaNeb® Systemnon-invasive devices that provide respiratory support and new MonarchTM System. These products are designed to assist patients in the mobilization of retained blockages that, if not removed, may lead to increased rates of respiratory infection, hospitalization, and reduced lung function.blockages. Front Line Care products are sold globally within multiple care settings including primary care, (Welch Allyn and Mortara products), acute care, extended care and home care (primarily respiratory health products). Approximately 32%36%, 30%34%, and 7%34% of our revenue duringin fiscal 2017, 20162020, 2019 and 2015, respectively, were2018 was derived from products within this segment.
Surgical Solutions. Our Surgical Solutions products include surgical tables, lights, pendants and pendantsoperating room integration technology utilized within the operating roomsurgical setting. We also offer a range of positioning devices for use in shoulder, hip, spinal and lithotomy surgeries as well as platform-neutral positioning accessories for nearly every model of operating room table. In addition, we offer operating room surgical safetyApproximately 11%, 15%, and accessory products such as scalpels and blades, light handle systems, skin markers and other disposable products. The products offered within this category are both capital sales and recurring consumable revenue streams that are sold globally. Approximately 16%, 15% and 21% of our revenue duringin fiscal 2017, 20162020, 2019 and 2015, respectively, were2018 was derived from products within this segment.
We have extensive distribution capabilities and broad reach across all health care settings. We primarily operate in the following channels: (1) sales and rentals of products to acute and extended care facilities worldwide through both a direct sales force and distributors; (2) sales and rentals of products directly to patients in the home; and (3) sales into primary care facilities (primarily Welch Allyn products) through distributors. Through our network of approximately 140163 North American and 4239 international service centers, and approximately 1,9002,000 service professionals, we provide technical support and services and rapidly deliver our products to customers on an as-needed, basis, providing our customers flexibility to purchase or rent select products. This extensive network is critical to serving our customers and securing contracts with Group Purchasing Organizations (“GPOs”) and Integrated Delivery Networks (“IDNs”).
No single customer accounts forrepresents more than 10% of our revenue.
Acquisitions and Dispositions
Acquisitions
During fiscal 2020 and 2019, we acquired the following companies:
| | | | | | | | | | | |
| Fiscal Year | Company Name | Description of the Business | Description of the Acquisition |
| 2020 | Excel Medical Electronics (“Excel Medical”) | Clinical communications software company located in the United States | Purchased all of the outstanding equity interest. |
| 2020 | Connecta Soft, S.A. de C.V. (“Connecta”) | Clinical communications software company based in Mexico. | Purchased the multiplatform medical device integration and connectivity software programs, products, and solutions of the company. |
| 2020 | Videomed S.r.l. (“Videomed”) | Developer of integrated video solutions in operating rooms located in Italy. | Purchased all of the outstanding equity interest. |
| 2019 | Voalte, Inc. (“Voalte”) | Clinical communications software company located in the United States. | Purchased all of the outstanding equity interest. |
| 2019 | Breathe Technologies, Inc. (“Breathe”) | Developer and manufacturer of a patented wearable, non-invasive ventilation technology that supports improved patient mobility. Located in the United States. | Purchased all of the outstanding equity interest. |
Asset Acquisition
During fiscal 2018, we acquired the right to use patented technology and certain related assets from a supplier to our Front Line Care segment.
Dispositions
During fiscal 2019 and 2018, we disposed of the following:
| | | | | | | | |
| Fiscal Year | Segment | Description of the Disposition |
| 2019 | Surgical Solutions | Sold certain of our surgical consumable products and related assets. |
| 2018 | Patient Support Systems | Conveyed certain net assets related to our third-party rental business, comprised of purchased moveable medical equipment that could be rented to customers. |
Refer to Note 3. Business Combinations for additional information regarding acquisitions and dispositions.
Raw Materials
Principal materials used in our products for each business segment include electronic and electromechanical components, carbon steel, aluminum, stainless steel, wood and laminates, petroleum basedpetroleum-based products, such as foams and plastics, and other materials, substantially allmajority of whichour raw material components are available from multiple sources. Motors and electronic controls for electrically operated beds and certain other components are purchased from one or more manufacturers.
Prices fluctuate for raw materials and sub-assemblies used in our products based on a number of factors beyond our control. Specifically, over the past several years, the fluctuating prices of certain raw materials, including metals, fuel, plastics and other petroleum-based products in particular, and fuel related delivery costs,electronic components as well as the impact from incremental China tariff had a direct effect on our profitability. Although we generally have not engaged in hedging transactions with respect to raw material purchases, we have entered into fixed price supply contracts at times.effectively mitigated a portion of the cost pressure through improved operational efficiencies and enhanced supplier management.
Most of our extended contracts with hospital Group Purchasing Organizations ("GPOs")GPOs and other customers for the sale of products in North America permit us to institute annual list price increases, although we may not always be able to raise prices sufficiently to offset all raw material cost inflation.
Competition
Across our business, we compete on the basis of clinical expertise, and resulting product clinical utility and ability to produce favorable patient outcomes, as well as value, quality, customer service, innovation and breadth of product offerings. We evaluate our competition based on our product categories.segments.
The following table displays our significant competitors with respect to each product category:
|
| | | | | | | | | | |
Product CategoriesSegments | | Competitors |
| | |
| Patient Support Systems | | ArjoHuntleigh (Division of Getinge AB)
Ascom Holding
Joerns Healthcare
Linet
Arjo
LINET spol. s.r.o.
Paramount
Rauland, a Division of AMETEK, Inc. | SIZEWise Rentals, LLC
Stiegelmeyer
Stryker Corporation Universal Hospital Services, Inc.
Vocera
|
| | | |
| Front Line Care | | Covidien, Ltd.
Electromed, Inc.
Exergen Corporation
GE Healthcare
Heine Optotechnik
International Biophysics, Inc.
Keeler
Littman (3M)
Midmark Corporation | Mindray Midmark
Omron Medical International
OMRON Healthcare,
Inc.
Philips
Resmed
Respirtech (Part of Philips)
Riester
Schiller
Thayer Medical
AG
|
| | | |
| Surgical Solutions | | Action Medical
DeRoyal
Draeger
Maquet, (Divisiona Division of Getinge AB)
AB
MizuhoOSI | Skytron
Steris
Stryker Corporation
Swann-Morton
|
Additionally, we compete with a large number of smaller and regional manufacturers.
Regulatory Matters
FDA Regulation.Regulation
We design, manufacture, install and distribute medical devices that are regulated by the U.S. Food and Drug Administration ("FDA"(“FDA”) in the U.S. and similar agencies in other countries. The regulations and standards of these agencies evolve over time and require us to make changes in our manufacturing processes and quality systems to remain in compliance. The FDA’s Quality System regulations and the regulatory equivalents internationally set forth standards for our product design and manufacturing processes, require the maintenance of certain records and provide for inspections of our facilities. From time to time, the FDA performs routine inspections of our facilities and may inform us of certain deficiencies in our processes or facilities. In addition, there are certain state and local government requirements that must be complied with in the manufacturing and marketing of our products. See Item 1A. Risk Factors for additional information.
Environmental.Environmental
We are subject to a variety of federal, state, local and foreign environmental laws and regulations relating to environmental and health and safety concerns, including the handling, storage, discharge and disposal of hazardous materials used in, or derived from our manufacturing processes. When necessary, we provide for reserves in our financial statements for environmental matters. We do not expect the remediation costs for any environmental issues in which we are currently involved to exceed $1.0 million.
Health Care Regulations.Regulations
In March 2010, comprehensive health care reform legislation in the United States was signed into law through the passage of the Patient Protection and Affordable Health Care Act and the Health Care and Education Reconciliation Act. The health care industry continues to undergo significant change, asboth in response to this law is executed. Currently, the Trump Administration and the U.S. Congress are seekingin response to modify, repeal or otherwise invalidate all or part of this health care reform legislationother legislative and it remains unclear what new framework may emerge as a result of such efforts.regulatory actions. In addition to health care reform, Medicare, Medicaid and managed care organizations, such as health maintenance organizations and preferred provider organizations, traditional indemnity insurers and third-party administrators are under increasing pressure to control costs and limit utilization, while improving quality and health care outcomes. These objectives are being advanced through a variety of reform initiatives including:including, but not limited to, accountable care organizations, value basedvalue-based purchasing, bundling initiatives and competitive bidding programs, etc.programs. We are also subject to a number of other regulations around the world related to the sale and distribution of health care products. The potential impact of these regulations to our
business is discussed further in Item 1A. Risk Factors and Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in this Form 10-K.
Product Development
MostWe pursue development of ournew products and product improvements are developed internally. We maintain closeprofessional working relationships with various medical professionals who assist in product research and development. New and improved products play a critical role in our sales growth. We continue to place emphasis on the development of proprietary products and product improvements to complement and expand our existing product lines. Our significant research and development activities are located in Acton, Massachusetts; Batesville, Indiana; Beaverton, Oregon; Bologna, Italy; Cary, North Carolina; Irvine, California; Milwaukee, Wisconsin; Sarasota, Florida; Skaneateles Falls, New York; Bologna, Italy; Pluvigner, France; Singapore; and Saalfeld and Pucheim,Puchheim, Germany.
Research and development is expensed as incurred. Research and development expense forin the fiscal years ended September 30, 2017, 20162020, 2019 and 2015,2018 was $133.7$136.5 million, $133.5$139.5 million and $91.8 million, respectively.$135.6 million.
In addition, certain software development technology costs for software to be sold or licensed to customers are capitalized as intangibles and are amortized over a period of three to five years once the software is ready for its intended use. The amounts capitalized duringin the fiscal years 2017, 2016ended September 30, 2020, 2019 and 2015 were2018 was approximately $2.3$15.3 million, $2.4$8.0 million and $2.6 million, respectively.$2.4 million.
Patents, Trademarks and TrademarksTrade Names
We own, and may license from time-to-time license,others, a number of patents on our products and manufacturing processes, but we do not believe any single patent or related group of patents is of material significance to any business segment or our business as a whole. We also own a number of trademarks, trade names and service marks relating to our products and services. Except for the marks "Hill-Rom®"“HillromTM”, "Bard-Parker“Hill-Rom®",” and "Welch“Welch Allyn®"”, we do not believe any single trademark, trade name or service mark is of material significance to any business segment or our business as a whole.
Foreign Operations
Information about our foreign operations is set forth in tables relating to geographic information in Note 1114. Segment Reporting of our Consolidated Financial Statements included herein under Part II, Item 8 of this Form 10-K.
EmployeesHuman Capital Resources
AtAs of September 30, 2017, we2020, Hillrom had more thanapproximately 10,000 employees worldwide. Approximately 3%worldwide, with approximately 6,000 employees in the United States and approximately 4,000 employees outside of the United States. Hillrom’s global presence enables our strategic priority of expanding internationally and penetrating emerging markets with our differentiated solutions. Our employees are our most important assets and they set the foundation for our ability to achieve our strategic objectives. All of our employees contribute to Hillrom’s success and, in particular, the employees in our manufacturing, sales, research and development and quality assurance departments are instrumental in driving operational execution and strong financial performance, advancing innovation and maintaining a strong quality and compliance program.
The success and growth of Hillrom’s business depend in large part on our ability to attract, retain and develop a diverse population of talented and high-performing employees at all levels of our organization, including the individuals who comprise our global workforce as well as executive officers and other key personnel. To succeed in a competitive labor market, Hillrom has developed key recruitment and retention strategies, objectives and measures that we focus on as part of the overall management of our business. These strategies, objectives and measures form the pillars of our human capital management framework and are advanced through the following programs, policies and initiatives:
•Competitive Pay and Benefits. Hillrom’s compensation programs are designed to align the compensation of our employees with Hillrom’s performance and to provide the proper incentives to attract, retain and motivate employees to achieve superior results. The structure of our compensation programs balances incentive earnings for both short-term and long-term performance. Specifically:
◦We provide employee wages that are competitive and consistent with employee positions, skill levels, experience, knowledge and geographic location.
◦We engage nationally recognized outside compensation and benefits consulting firms to independently evaluate the effectiveness of our executive compensation and benefit programs and to provide benchmarking against our peers within the industry.
◦We align our executives’ long-term equity compensation with our shareholders’ interests by linking realizable pay with stock performance.
◦Annual increases and incentive compensation are based on merit, which is communicated to employees at the time of hiring and documented through our talent management process as part of our annual review procedures and upon internal transfer and/or promotion.
◦All employees are eligible for health insurance, paid and unpaid leaves, a retirement plan and life and disability/accident coverage. We also offer a variety of voluntary benefits that allow employees to select the options that meet their needs, including flexible time-off, telemedicine, paid parental leave, adoption assistance, a travel solution for nursing moms, family building benefits, prescription savings solutions, Veterans' Health Administration coverage in U.S. medical plans, transgender medical coverage, a personalized wellness program, a financial wellness program and expanded coverage for diabetic employees.
•Advancing and Celebrating Diversity, Inclusion and Belonging (“DIB”). DIB is vital to Hillrom’s ability to grow the business and innovate in an ever-changing, fast-paced environment. Our diverse and inclusive workplace encourages different perspectives and ideas, which we believe enables better business decisions and rapid innovation. The following are highlights of Hillrom’s DIB program:
◦We have established a DIB Council that provides strategic direction, guidance and advocacy for Hillrom's DIB initiatives and advancements and is led by our Chief Executive Officer and Chief Human Resources Officer and includes high-performing leaders from around the world.
◦As of September 30, 2020, women leaders made up 36% of Hillrom’s Board of Directors and 38% of Hillrom’s Executive Leadership Team.
◦We sponsor multiple Employee Resources Groups, which are employee-led and open to all employees, including: Pride Partnership; Individuals with Disabilities Empowered to Achieve; Veteran Employee Team; Embrace—A Black Professional Organization; Professional Women’s Group; and HOLA (Hillrom Organization for Latinex Advancement).
◦We recruit diverse talent through local partnerships with organizations such as RecruitMilitary, HACE (Hispanic Alliance for Career Enhancement), Diversity Best Practice, National Society of Black Engineers and Getting Hired (focused on individuals with disabilities).
•Health and Safety. Health and safety are firmly rooted across Hillrom's global footprint. In fiscal 2020, Hillrom completed the deployment across its manufacturing facilities of its new environmental health and safety management system, which is designed to streamline data collection, ensure greater consistency and accuracy across global operations and improve health and safety performance. We prioritize, manage and carefully track safety performance at all locations globally and integrate sound safety practices to make a meaningful difference in every facet of our operations. During fiscal 2020, Hillrom reduced its recordable injury rate compared to fiscal 2019 by 27% (0.38 recordable injuries per 100 workers per year) on a company-wide basis and by 56% (0.32 recordable injuries per 100 workers per year) across its manufacturing operations.
In response to the COVID-19 pandemic and related mitigation measures, we implemented changes in our business in March 2020 in an effort to protect our employees and customers, and to support appropriate health and safety protocols. For example, we installed physical barriers between employees in production facilities, implemented extensive cleaning and sanitation processes for both production and office administration spaces and implemented broad work-from-home initiatives for employees in our administrative functions. While Hillrom’s essential workers (production and field service employees) have continued to work at our facilities and provide vital service to our customers, most employees in our administrative functions have effectively worked remotely since mid-March. During the fiscal year ended September 30, 2020, incremental non-recurring special compensation costs of $3.7 million were paid to Hillrom’s essential workers.
•Labor Relations/Fair Labor Practice. We are committed to equal opportunity employment and working effectively with existing unions. As of September 30, 2020, approximately 8% of our employees in the U.S. workUnited States (including contingent workers) worked under collective bargaining agreements. We are also subject to various collective bargaining arrangements or national agreements outside the U.S. covering approximately 16% of our employees. The collective bargaining agreement at our primary U.S. manufacturing facility expires in January 2019. We have not experienced a work stoppage in the U.S.United States in over 40 years, and we believe that our employee relations are satisfactory. ReferThe two collective bargaining agreements at our primary U.S. manufacturing facility expire in January 2021 and January 2022. We are also subject to Item 1A. Risk Factorsvarious collective bargaining arrangements and/or national trade union agreements outside the United States. As of September 30, 2020, approximately 65% of our employees outside the United States (including contingent workers) worked under such arrangements.
•Recruitment, Training and Development. We use recruitment vehicles to attract diverse talent to our organization, including partnerships with local and national organizations, HBCUs (Historically Black Colleges and Universities) and various social media outlets. Hillrom invests in learning opportunities that foster a growth mindset. Our formal offerings include a tuition reimbursement program, an e-learning platform known as Hillrom University (“HRU”) and virtual workshops that support our culture, strategy and the development of crucial skills. To measure the impact of the investments we make in our people, and to help us continually improve our human resources programs, we regularly track a number of critical metrics, including the following:
◦Internal Hires: We track the percentage of open positions filled with internal candidates and use this Form 10-K for additional informationmetric as a measure of how successfully we are promoting talent from within. For the fiscal year ended September 30, 2020, the data was as follows:
▪Director and above: 34%
▪Manager and above: 45%
▪All levels: 31%
◦Employee Satisfaction: We conduct an anonymous bi-annual engagement survey of our global workforce. Administered and analyzed by an independent third-party, the survey results are reviewed by the executive officers. The results of this engagement survey are shared with individual managers, who are then tasked with taking action based on their employees’ anonymous feedback (both quantitative and qualitative). By paying close attention to the results both at an aggregate enterprise level as well as at a department/business/work group level, Hillrom has been able to enhance its culture of respect, help educate employees more effectively about our employees.benefits offerings as well as our learning and development opportunities and further improve our communications content, mechanisms and frequency.
Executive Officers
The following sets forth certain information regarding our executive officers. The term of office for each executive officer expires on the date his or her successor is chosen and qualified. No director or executive officer has a "family relationship"“family relationship” with any other director or executive officer of the Company, as that term is defined for purposes of this disclosure requirement. There is no understanding between any executive officer and any other person pursuant to which the executive officer was selected.
John J. Greisch, 62,P. Groetelaars, 54, was elected President and Chief Executive Officer of Hill-Rom,Hillrom, effective January 2010.May 2018. Previously, Mr. GreischGroetelaars was most recentlyExecutive Vice President International Operations for Baxter International, Inc., a position he held since 2006.and President of Becton, Dickinson and Company’s (“BD”) Interventional Segment. Prior to this,the BD acquisition of C.R. Bard, Mr. Groetelaars was Group President at Bard, which he had joined in 2008. He previously held several other positions of increasing responsibility with Baxter, serving as Baxter'sBoston Scientific Corporation, Guidant Corporation and Eli Lilly.
Barbara W. Bodem, 52, was elected Senior Vice President and Chief Financial Officer, effective December 2018. Before joining Hillrom, she served as Senior Vice President, Finance at Mallinckrodt. Previously, she served in a variety of senior finance roles for Hospira, Inc. and Eli Lilly, including serving as PresidentCFO of Baxter's BioScience division.Lilly Oncology.
Carlos Alonso, 58,Amy Dodrill, 47, was elected Senior Vice President and President, Hill-Rom International,Surgical Solutions, effective April 2015.June 2019. She had previously served as Vice President of our U.S. Surgical Solutions sales operations and prior to that, as an area vice president in our Patient Support Systems business since joining Hillrom in October 2011. Before joining Hill-Rom, Mr. AlonsoHillrom, she held several senior leadership roles at DynaVox Systems LLC and GE Healthcare.
Andreas G. Frank, 44, was elected Senior Vice President and President, Front Line Care, effective December 2018. He previously served as the PresidentChief Transformation Officer and CEO of the Esaote Group, a medical imaging leader based in Genova, Italy. Prior to the Esaote Group, Mr. Alonso served as the CEO of Esteve Pharmaceuticals based in Barcelona, Spain, and held various leadership roles of increasing responsibility with Baxter International, Inc. over the course of fifteen years, including serving as Global President of the Renal Division.
Andreas Frank, 41, was elected as Senior Vice President Corporate Development and Strategy, effectivesince joining Hillrom in October 2011. Before joining Hill-Rom, Mr. FrankHillrom, he was Director, Corporate Development at Danaher Corporation. Previously, he worked in the Corporate Finance and Strategy practice at the consulting firm McKinsey & Company.
Paul Johnson, 52,55, was elected as Senior Vice President and President of Patient Support Systems, effective November 2016. He had previously served as president,President, PSS North America.America, since joining Hillrom in February 2013. Before joining Hill-Rom in 2013, Mr. JohnsonHillrom, he held various commercial leadership positions at Life Technologies and GE Healthcare.
Mary Kay Ladone, 54, was elected Senior Vice President, Corporate Development, Strategy and Investor Relations, effective December 2018. She previously served as Vice President, Investor Relations, since joining Hill-Rom in July 2016. Before
joining Hillrom, she served as Senior Vice President, Investor Relations, of Baxalta Incorporated. Previously, she served in a variety of senior finance, business development and investor relations roles for Baxter International.
Kenneth Meyers, 55,58, was elected Senior Vice President and Chief Human Resources Officer, effective September 2015. Before joining Hill-Rom, Mr. MeyersHillrom, he was Senior Vice President and Chief Human Resources Officer at Hospira, Inc. Previously, he was a partner at Mercer / Oliver Wyman Consulting. Prior to Mercer / Oliver Wyman, he served as Senior Vice President, Human Resources, for Starbucks International.
Deborah M. Rasin, 51,54, was elected Senior Vice President, Chief Legal Officer and Secretary, for Hill-Rom, effective January 2016. PreviouslyBefore joining Hillrom, she was General Counsel for Dentsply Sirona,International Inc. Prior to Dentsply, Ms. RasinPreviously, she served as General Counsel at Samsonite Corporation (for which she worked in Denver and London) and as a senior attorney at GM (in Detroit and Zurich).General Motors.
Jason A. Richardson, 40,Richard M. Wagner, 52, was elected Vice President, Controller and Chief Accounting Officer, of the Company, effective March 2016. Mr. Richardson previously served in a variety of finance and accounting positions with Hill-Rom, including Assistant Controller and head of finance for Hill-Rom’s Surgical and Respiratory Care division.
Alton Shader, 44,May 2018. Before joining Hillrom, he was elected Senior Vice President, Finance at Cree, Inc. and President, Front Line Care, effective September 2015. He had served as Senior Vice President and President, North America since July 2012 and previously as Senior Vice President and President, Post-Acute Care with Hill-Rom since July 2011. Before joining Hill-Rom, Mr. Shader was General Manager of Renal at Baxter International, Inc. Previously,prior to that role, he served as General Manager for Baxter Ireland and held senior marketing positions in Baxter's operations in Zurich and in California.
Steven J. Strobel, 59, was elected Senior Vice President, effective November 2014 and Chief Financial Officer, effective December 2014. Before joining Hill-Rom, Mr. Strobel was President of McGough Road Advisors, a corporate finance consulting firm, from 2012 to 2014 and previously Chief Financial Officer of BlueStar Energy, an independent retail energy services company, from 2009 to 2012. Prior to BlueStar, he served as Treasurer and Corporate Controller at Motorola, and in the same positions at Owens Corning. Mr. Strobel serves on the Board of Directors of Newell BrandsDentsply Sirona, Inc., where he chairs the Audit Committee.
Francisco Canal Vega, 56, was elected Senior Vice President and President, Surgical Solutions, effective June 2017. He had served as President of our Europe region. Before joining Hill-Rom, Mr. Canal held several senior executive roles at Baxter, Gambro, and Smith & Nephew.
Availability of Reports and Other Information
Our website is www.hill-rom.comwww.hillrom.com. We make available on this website, free of charge, access to our annual, quarterly and current reports and other documents we file with, or furnish to, the Securities and Exchange Commission ("SEC")SEC as soon as practicable after such reports or documents are filed or furnished. We also make available on our website position specifications for the Chairman,Chairperson, members of the Board of Directors (“Board”) and the Chief Executive Officer, our Global Code of Conduct (and any amendments or waivers), the Corporate Governance Standards of our Board of Directors and the charters of each of the standing committees of the Board of Directors.Board. All of these documents are also available to shareholders in print upon request.
All reports filed with the SEC are also available via the SEC website, www.sec.gov, or may be read and copied at the SEC Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
Item 1A.RISK FACTORS
Our business involves risks.risks related to economic, market, regulatory and legislative factors in the jurisdictions in which we operate. The following information about these risks shouldbe considered carefully together with the other information contained herein.The risks described below are not the only risks we face.faced by Hillrom. Additional risks notcurrently known or deemedconsidered immaterial also might result in adverse effects on ourbusiness. Any of these risks could have a material adverse impact on our business, financial condition, future results or future results.cash flows. The order in which these factors appear should not be construed to indicate their relative importance or priority.
COVID-19 Risks
Our business, results of operations, financial condition and prospects could be materially and adversely affected by the ongoing COVID-19 pandemic and the related effects on public health.
In December 2019, there was an outbreak of a novel strain of coronavirus (COVID-19) in China that has since spread to nearly all regions of the world. The outbreak was subsequently declared a pandemic by the World Health Organization in March 2020. To date, the COVID-19 outbreak and preventive measures taken to contain or mitigate the outbreak have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas and significant disruption in global financial markets.
In response to the COVID-19 pandemic and related mitigation measures, we implemented changes in our business in March 2020 to protect our employees and customers through appropriate health and safety protocols. For example, we installed physical barriers between employees in production facilities, implemented extensive cleaning and sanitation processes for both production and office administration spaces, and implemented broad work-from-home initiatives for employees in our administrative functions. Implementing these measures resulted in additional costs in fiscal 2020, which we expect will continue in fiscal 2021 as we work to address employee safety. These additional costs did not have a material impact on our Statements of Consolidated Income during fiscal 2020, and we anticipate a similar impact for fiscal 2021.
Although we experienced some challenges in connection with the COVID-19 pandemic, including declines in revenue related to project delays in our care communications business and reduced demand for certain of our patient exam and diagnostic products, at this time, we have not experienced a negative impact on our liquidity or results of operations. While we generally expect the level of demand for our products negatively impacted by the COVID-19 pandemic to recover as we progress through fiscal 2021, we are unable to predict the ultimate impact of the COVID-19 outbreak, including the nature and timing of when
demand recovery may occur. The continued spread of COVID-19 could negatively impact our business, results of operations, financial condition and prospects in a number of ways in the future. For example, it could, among other things:
•interrupt, slow, or render our supply chains inoperable, resulting in more expensive alternative sources of labor and materials or an inability to find such alternative sources of labor and materials for our products;
•subject us to governmental mandates and quarantines that may require forced shutdowns of our facilities for extended or indefinite periods due to public health measures;
•increase regulation of our industry, up to and including the exercise of war powers under The Defense Production Act of 1950, as amended, which could require us to turn over our production capabilities to the U.S. Government;
•substantially interfere with general commercial activity related to our customer base if our customers' businesses are affected by the outbreak, including through delays or reductions of purchases of our products;
•diminish our ability to adequately predict customer demand for our products, which could adversely impact our ability to effectively manage inventory levels;
•cause health care providers to limit or restrict access to their facilities to only essential personnel for a material amount of time, adversely impacting our ability to complete installations of our care communications offerings and operating room equipment, and limiting contact with our sales personnel;
•reduce the number of ambulatory care or office visits if health care providers prioritize pandemic-related treatment and governmental and industry associations recommend the deferral of elective surgeries;
•cause our employees, including key executives, our production and service workforce and functional team members to become ill, quarantined or otherwise unable to work or travel due to health reasons or governmental restrictions;
•increase absenteeism or cause workplace disruption related to employees working from home or remotely;
•contribute to adverse changes in general domestic and global economic conditions, including recession or economic slowdown and disruption of domestic and international credit markets, which could negatively impact our customers' ability to pay us as well as our ability to access capital that could in the future negatively affect our liquidity;
•result in the establishment of trade barriers that disrupt the flow of goods and increase costs associated with logistics and transportation;
•decrease our ability to grow our business through mergers, acquisitions and other similar business arrangements during any such pandemic or other outbreak as targets focus on operating their respective businesses;
•negatively impact innovation and development of new products as our research and development (“R&D”) teams may be required to work from home and resources and energy may be redirected during any such outbreak; or
•contribute to a recession or market correction that could adversely affect the value of our common stock.
The situation surrounding the COVID-19 pandemic remains fluid, and given its inherent uncertainty, it could have an adverse impact on our business in the future. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the impact of these and other factors on our employees, customers, suppliers, service providers and business partners.If COVID-19 continues to spread and escalate domestically or internationally, or if governments impose additional measures intended to mitigate the spread and related effects of the pandemic, the risks described above could be elevated significantly.
Should these conditions persist for a prolonged period, the COVID-19 pandemic, including any of the above factors and others that are currently unknown, could have a material adverse impact on our business, results of operations, financial condition and prospects and could heighten many of our known risks described in this Item 1A. Risk Factors, any of which could have a material effect on us.
Regulatory Risks
We face significant uncertainty in theour industry due to government health care reform, healthcare reform laws, changes in Medicare, Medicaid and other governmental medical program reimbursements and for which we cannot predict how thesesuch reforms will impact our operating results.
In March 2010, the U.S. Congress adopted and President Obama signed into law comprehensive health care reform legislation through the passage of the Patient Protection and Affordable Health Care Act (H.R. 3590) and the Health Care and Education Reconciliation Act (H.R. 4872) (collectively, “the Healthcare Reform Act”). The provisions of the Healthcare Reform Act are intended to expand access to health insurance coverage and improve the quality of healthcare over time. However, other provisions of the legislation, including Medicare provisions, aim to decrease costs through comparative effectiveness research, and pilot programs to evaluate alternative payment methodologies could result in pricing pressure or negatively impact the demand for our products.
We cannot predict with certainty what additional healthcarefuture health care initiatives, if any, will be implemented at the federal or state level, or what the ultimate effect of federal health care reform or any future legislation or regulation will have on us. Currently, the Trump AdministrationGlobally, managed care organizations, such as Medicare and the U.S. Congress are seeking to modify, repeal or otherwise invalidate all or part of this health care reform legislation and it remains unclear what new framework may emerge as a result of such efforts. Further, regardless of the prevailing political environmentMedicaid in the United States, Medicare, Medicaid, managed care organizations and foreign governments are facing increasing pressure to both control health care utilization and to limit reimbursement. Changes in reimbursement programs or their regulations, including retroactive and prospective rate and coverage criteria changes, competitive bidding for certain products and services, and other changes intended to reduce expenditures (domestically or internationally), could adversely affect the portions of our businesses that are dependent on third-party reimbursement or direct governmental payments. Moreover, to the extent that our healthcare provider customers experience reimbursement pressure resulting in lower revenue for them, their demand for our products and services might decrease. The impact of the above mentionedabove-mentioned items could have a material adverse impact on our business, results of operations and cash flows.
Failure by us or our suppliers to comply with the FDA regulations and similar foreign regulations applicable to the products we design, manufacture, install or distribute could expose us to enforcement actions or otheradverse consequences.
We design, manufacture, install and distribute medical devices that are regulated by the FDA in the U.S. and similar agencies in other countries. Failure to comply with applicable regulations could result in future product recalls, injunctions preventing the shipment of products or other enforcement actions that could have a material adverse effect on our revenue and profitability. Additionally, certain of our suppliers are subject to FDA regulations, and theregulations. The failure of these suppliers to comply with regulations could adversely affect us as regulatory actions taken by the FDA against those manufacturers can result in product shortages, recalls or modifications. We are also subject to the European Medical Device Regulation, which was adopted by the European Union (“EU”) as a common legal framework for all EU member states. These regulations require companies that wish to manufacture and distribute medical devices in EU member states to meet certain quality system and safety requirements and ongoing product monitoring responsibilities, and obtain a “CE” marking (i.e., a mandatory conformity marking for certain products sold within the European Economic Area) for their products. Various penalties exist for non-compliance with the laws implementing the European Medical Device Regulations which if incurred, could have a material adverse impact on our business, results of operations and cash flows.
We could be subject tosubstantial fines or damages and possible exclusion from participation in federal or state healthcare programs if we fail to comply with the laws and regulations applicable toour business.
We are subject to stringent laws and regulations at both the federal and state levels governing the participation of durable medical equipment suppliers in federal and state health care programs. From time to time, the government seeks additional information related to our claims submissions, and in some instances government contractors perform audits of payments made to us under Medicare, Medicaid, and other federal health care programs. On occasion, these reviews identify overpayments for which we submit refunds. At other times, our own internal audits identify the need to refund payments. We believe the frequency and intensity of government audits and review processes has intensifiedgrown and we expect this will continue in the future, due to increased resources allocated to these activities at both the federal and state Medicaid level, and greater sophistication in data review techniques.
If we are deemedconsidered to have violated these laws and regulations, we could be subject to substantial fines, damages, possible exclusion from participation in federal health care programs such as Medicare and Medicaid and possible recoupment of any overpayments related to such violations. While we believe that our practices materially comply with applicable state and federal requirements, the requirements might be interpreted in a manner inconsistent with our interpretation. Failure to comply with applicable laws and regulations, even if inadvertent, could have a material adverse impact on our business.
We operate in a highly competitive industry that is subject to the risk of declining demand and pricing pressures, which could adversely affect our operating results.
Demand for our products and services depends in large part on overall demand in the health care market. Additionally, with the health care market’s increased focus on hospital asset and resource efficiency as well as reimbursement constraints, spending for some of our products is on a long-term declining trend. Further, the competitive pressures in our industry could cause us to lose market share unless we increase our expenditures or reduce our prices, which could adversely impact our operating results. The nature of this highly competitive marketplace demands that we successfully introduce new products into the market in a cost effective manner (more fully detailed below). These factors, along with possible legislative developments and others, might result in significant shifts in market share among the industry's major participants, including us. Accordingly, if we are unable to effectively differentiate ourselves from our competitors in terms of both new products and diversification of our product portfolio through business acquisitions, then our market share, sales and profitability could be adversely impacted through lower volume or decreased prices.
We have a substantial amount of indebtedness. This level of indebtedness could adversely affect our ability to raise additional capital to fund operations, our flexibility in operating our business and our ability to react to changes in the economy or our industry.
At September 30, 2017, we had $2,309.3 million of indebtedness outstanding net of certain issuance costs. As a result of this debt, we have significant demands on our cash resources. The level of debt could, among other things:
require us to dedicate a large portion of our cash flow from operations to the servicing and repayment of our debt, thereby reducing funds available for working capital, capital expenditures, research and development expenditures and other general corporate requirements;
limit our ability to obtain additional financing to fund future working capital, capital expenditures, research and development expenditures and other general corporate requirements;
limit our flexibility in planning for, or reacting to, changes in its business and the industry in which we operate;
restrict our ability to make strategic acquisitions or dispositions or to exploit business opportunities;
place us at a competitive disadvantage compared to competitors that have less debt;
adversely affect our credit rating, with the result that the cost of servicing our indebtedness might increase;
adversely affect the market price of Hill-Rom common stock;
limit our ability to apply proceeds from an offering or asset sale to purposes other than the servicing and repayment of debt; and
cause us to fail to meet payment obligations or otherwise default under our debt, which will give our lenders the right to accelerate the indebtedness and exercise other rights and remedies against us.
In addition, we might incur substantial additional indebtedness in the future, which could cause the related risks to intensify. We might need to refinance all or a portion of our indebtedness on or before their respective maturities. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. The terms of any additional debt might give the holders rights, preferences, and privileges senior to those of holders of our common stock, particularly in the event of liquidation. The terms of any new debt might also impose additional and more stringent restrictions on our operations than are currently in place. If we are unable to refinance our debt, we might default under the terms of our indebtedness, which could lead to an acceleration of the debt. We do not expect that we could repay all of our outstanding indebtedness if the repayment of such indebtedness was accelerated.
Our future financial performance will depend inpart on the successful introduction of new products into the marketplace on acost-effective basis.
Our future financial performance will depend in part on our ability to influence, anticipate, identify and respond to changing consumer preferences and needs. We can provide no assurances that our new products will achieve the same degree of success as in the past. We might not correctly anticipate or identify trends in consumer preferences or needs, or might identify them later than competitors do. In addition, difficulties in manufacturing or in obtaining regulatory approvals might delay or prohibit introduction of new products into the marketplace. Further, we might not be able to develop and produce new products at a cost that allows us to meet our goals for profitability. Warranty claims and service costs relating to our new products might be greater than anticipated, and we might be required to devote significant resources to address any quality issues associated with our new products, which could reduce the resources available for further new product development and other matters. In addition, the introduction of new products might also cause customers to defer purchases of existing products.
Failure to successfully introduce new products on a cost-effective basis, or delays in customer purchasing decisions related to the evaluation of new products, could cause us to lose market share and could materially adversely affect our business, financial condition, results of operations and cash flow.
Adverse developments in general domestic and worldwide economic conditions and instability and disruption of credit markets could have an adverse effect on our operating results, financial condition, or liquidity.
We are subject to risks arising from adverse changes in general domestic and global economic conditions, including recession or economic slowdown and disruption of domestic and international credit markets. The credit and capital markets could experience extreme volatility and disruption which could lead to periods of recessionary conditions and depressed levels of consumer and commercial spending. These recessionary conditions could cause customers to reduce, modify, delay or cancel plans to purchase our products and services. If our customers reduce investments in capital expenditures or utilize their limited capital funds to invest in products that we do not offer or that do not comprise a large percentage of our product portfolio, it could negatively impact our operating results. Moreover, even if our revenue remains constant, our profitability could decline if there is a shift to sales of
product mix or geographic locations with less favorable margins. If worldwide economic conditions worsen, we would expect our customers to scrutinize costs resulting from pressures on operating margin due to rising supply costs, reduced investment income and philanthropic giving, increased interest expense, reimbursement pressure, reduced elective healthcare spending and uncompensated care.
We might not be able to grow or achieve expected cost savings or profitability if we are unable to successfully acquire and integrate, or form business relationships with, other companies.
We have in the past, and expect in the future, to grow our business through mergers, acquisitions and other similar business arrangements. We might not be able to identify suitable acquisition candidates or business relationships, negotiate acceptable terms for such acquisitions or relationships or receive necessary financing on acceptable terms for such acquisitions or relationships. Additionally, we might become responsible for liabilities associated with businesses that we acquire to the extent they are not covered by indemnification from the sellers or by insurance. Even if we are able to consummate acquisitions, such acquisitions could be dilutive to earnings and we might not be fully successful in our integration efforts or fully realize expected benefits from the integration. Our integration efforts might also divert management and other resources from other important matters, and we could experience delays or unusual expenses in the integration process, including intangible asset impairments which could result in significant charges in our Statements of Consolidated Income. Moreover, the margins for these companies might differ from our historical gross and operating margins resulting in a material adverse effect on our results of operations.
Failure to comply with regulations due to our contracts with U.S. government entities could adversely affect our business and results of operations.
Our U.S. business contracts with U.S. government entities and isare subject to specific rules, regulations and approvals applicable to government contractors. U.S. government agencies often reserve the right to conduct audits and investigations of our business practices to assure our compliance with these requirements. Our failure to comply with these or other laws and regulations could result in contract terminations, suspension or debarment from contracting with the U.S. federal government, civil fines and damages and criminal prosecution. In addition, changes in procurement policies, budget considerations, unexpected U.S. developments, such as changes in the funding or structure of Department of Veterans Affairs or other government agencies to which we sell our products and services, might adversely affect sales to U.S. government entities.
Capital and Credit Risks
We have a substantial amount of indebtedness. This level of indebtedness could adversely affect our ability to raise additional capital to fund operations, our flexibility in operating our business and our ability to react to changes in the economy or our industry.
As of September 30, 2020, we had $1,878.0 million of indebtedness outstanding net of certain issuance costs. As a result of this debt, we have significant demands on our cash resources. The assetslevel of debt could, among other things:
•require us to dedicate a large portion of our cash flow from operations to the servicing and repayment of our debt, thereby reducing funds available for working capital, capital expenditures, research and development expenditures and other general corporate requirements;
•limit our ability to obtain additional financing to fund future working capital, capital expenditures, research and development expenditures and other general corporate requirements;
•limit our flexibility in planning for, or reacting to, changes in our pension plansbusiness and the industry in which we operate, including the continued impacts of COVID-19, which could require additional resources or a reallocation of capital to respond to changing priorities;
•restrict our ability to make strategic acquisitions or dispositions or to maximize business opportunities;
•adversely affect our credit rating, with the result that the cost of servicing our indebtedness might increase;
•adversely affect the market price of our common stock;
•limit our ability to apply proceeds from an offering or asset sale to purposes other than the servicing and repayment of debt; and
•cause us to fail to meet payment obligations or otherwise default under our debt, which will give our lenders the right to accelerate the indebtedness and exercise other rights and remedies against us.
In addition to the indebtedness we had outstanding as of the fiscal year ended September 30, 2020, we might incur substantial additional indebtedness in the future, which could cause the related risks to intensify. We may refinance all or a portion of our indebtedness on or before their respective maturities. We cannot provide assurances that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. The terms of any additional debt might give the holders rights, preferences, and privileges senior to those of holders of our common stock, particularly in the event of liquidation. The terms of any new debt might also impose additional and more stringent restrictions on our operations than are currently in place. If we are unable to refinance our debt, we might default under the terms of our indebtedness, which could lead to an acceleration of the required repayment of the outstanding balance. We do not expect that we could repay all of our outstanding indebtedness if the repayment of such indebtedness was accelerated.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under the Senior Credit Agreement and Securitization Facilities will be at variable rates of interest and expose us to interest rate risk. If interest rates were to increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Assuming all loans under the Senior Credit Agreement and Securitization Facilities were fully drawn, each quarter point change in interest rates, excluding the effects of any interest rate swap agreements, would result in a $5.9 million change in annual interest expense on our indebtedness under the Senior Credit Agreement and Securitization Facilities. In the future, we may enter into additional interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk.
Our Senior Credit Agreement, Securitization Facilities and certain derivative instruments use the London Interbank Offered Rate (“LIBOR”) as a benchmark for establishing interest rates. On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to phase out LIBOR by the end of December 2021. We may have to negotiate new credit terms or potentially incur additional indebtedness that rely on an alternative interest rate method to LIBOR as a result of the LIBOR phase out. Any legal or regulatory changes made in response to LIBOR’s future discontinuance may result in, among other things, a sudden or prolonged increase or decrease in LIBOR, a delay in the publication of LIBOR, or changes in the rules or methodologies in LIBOR. In addition, alternative methods to LIBOR may not yet have been established by the end of December 2021, and the impact of such alternative methods may be impossible or impracticable to determine. While we do not
expect that the transition from LIBOR will have a material adverse effect on our results of operations and cash flows, it is still uncertain at this time.
Adverse developments in general domestic and worldwide economic conditions and instability and disruption of credit markets could have an adverse effect on our operating results, financial condition, or liquidity.
We are subject to market disruptions. In addition, our pension plans are underfunded.
Our primary pension plan investsrisks arising from adverse changes in a varietygeneral domestic and global economic conditions, including recession or economic slowdown and disruption of equitydomestic and debt securities subject to market risks. In addition, our pension plans are underfunded by $61.4 million based on our projected benefit obligationinternational credit markets. The credit and fair value of plan assets at September 30, 2017. Marketcapital markets could experience extreme volatility and disruption that could lead to periods of recessionary conditions and depressed levels of consumer and commercial spending. These recessionary conditions could cause declinescustomers to reduce, modify, delay or cancel plans to purchase our products and services. If our customers reduce investments in capital expenditures or utilize their limited capital funds to invest in products that we do not offer, it could negatively impact our operating results. Even if our revenue remains constant, our profitability could decline if there is a shift to sales of product mix or geographic locations with less favorable margins. Moreover, volatility in the credit markets could adversely affect our suppliers’ access to capital and therefore their ability to continue to provide an adequate supply of the materials we use in our products and may result in higher supply costs.
If worldwide economic conditions worsen, we would expect our customers to scrutinize costs resulting from pressures on operating margin due to rising supply costs, reduced investment income and philanthropic giving, increased interest expense, reimbursement pressure, reduced elective health care spending and uncompensated care.
Operating and Product Risks
We operate in a highly competitive industry that is subject to the risk of declining demand and pricing pressures, which could adversely affect our operating results.
Demand for our products and services depends in large part on overall demand in the health care market. With the health care market’s increased focus on hospital asset valuesand resource efficiency as well as reimbursement constraints, spending for some of our products could decline over time. Further, the competitive pressures in our industry could cause us to lose market share unless we increase our commercial investments or fluctuationsreduce our prices, which could adversely impact our operating results.
The nature of this highly competitive marketplace demands that we successfully introduce new products into the market in assumptions useda cost-effective manner (more fully detailed below). These factors, along with possible legislative developments and others, might result in significant shifts in market share among the industry’s major participants, which includes us. Accordingly, if we are unable to valueeffectively differentiate ourselves from our liabilitycompetitors in terms of new products and expenses. If this occurs,diversification of our product portfolio through business acquisitions, then our market share, sales and profitability could be adversely impacted through lower volume or decreased prices.
Our future financial performance will depend inpart on the successful introduction of new products into the marketplace in acost-effective manner.
Our future financial performance will depend in part on our ability to influence, anticipate, identify and respond to changing consumer preferences and needs, including those impacted by COVID-19, or a possible resurgence of COVID-19. We can provide no assurances that our new products will achieve commercial acceptance in the marketplace. We might not correctly anticipate or identify trends in customer preferences or needs or might identify them later than competitors do. In addition, difficulties in manufacturing or in obtaining regulatory approvals might delay or prohibit introduction of new products into the marketplace. Further, we might neednot be able to make additional pension plan contributionsdevelop and produce new products at a cost that allows us to meet our pension expensegoals for profitability. We may not be able to obtain patent protection on our new products or be able to defend our intellectual property rights globally. Warranty claims and service costs relating to our new products might be greater than anticipated, and we might be required to devote significant resources to address any quality issues associated with our new products, which could reduce the resources available for further new product development and other matters. In addition, the introduction of new products might also cause customers to defer purchases of existing products.
Failure to successfully introduce new products in a cost-effective manner, or delays in customer purchasing decisions related to the evaluation of new products, could cause us to lose market share and could materially adversely affect our business.
We might not be able to grow or achieve expected cost savings or profitability if we are unable to successfully acquire and integrate, or form business relationships with, other companies.
We have in the past, and expect in the future, yearsto grow our business through mergers, acquisitions and other similar business arrangements. We might increase.not be able to identify suitable acquisition candidates or business relationships, negotiate acceptable terms or receive necessary financing on acceptable terms for such acquisitions or relationships. Additionally, we might become responsible for liabilities associated with businesses that we acquire to the extent they are not covered by indemnification from the sellers or by insurance. Even if we can consummate acquisitions, such acquisitions could be dilutive to earnings and might not be successfully integrated to fully realize the expected benefits. Our integration efforts might also divert management and other resources from other important matters, and we could experience delays or unusual expenses in the integration process, including intangible asset impairments, which could result in significant charges in our Consolidated Financial Statements included under Part II, Item 8 of this Form 10-K. Moreover, the margins for these companies might differ from our historical gross and operating margins resulting in a material adverse effect on our results of operations.
Our business is significantlydependent on major contracts with GPOs, IDNs, and certain other distributors and purchasers.
A majority of our U.S. hospital sales and rentals are made pursuant to contracts with hospital GPOs. At any given time, we are typically at various stages of responding to bids, and negotiating and renewing expiring GPO agreements. Failure to be included in certain of these agreements could have a material adverse effect on our business, including product sales and service and rental revenue.
Participation by usOur participation in such programs often requires increased discounting or restrictions on our ability to raise prices, and failure to participate or to be selected for participation in such programs might result in a reduction of sales to the member hospitals. In addition, the industry is showing an increased focus on contracting directly with health systems or IDNs (which typically represent influential members and owners of GPOs). IDNs and health systems often make key purchasing decisions and have influence over the GPO’s contract decisions, and often request additional discounts or other enhancements. Further, certain other distributors and purchasers have similar processes to the GPOs and IDNs and failure to be included in agreements with these other purchasers could have a material adverse effect on our business.
Increased prices for, or unavailability of, raw materials or sub-assembliesused in our products could adversely affect profitability or revenue. Inparticular, our results of operations could be adversely affected by highprices for metals, fuel, plastics and other petroleum-based products. We also procure several raw materials and sub-assemblies from single suppliers.
Our profitability is affected by the prices and availability of the raw materials and sub-assemblies used in the manufacture of our products. These prices might fluctuate based on a number of factors beyond our control, including changes in supply and demand, general economic conditions, labor costs, fuel related delivery costs, competition, import duties, tariffs, currency exchange rates, and government regulation. Significant increases in the prices of raw materials or sub-assemblies that cannot be recovered through increases in the prices of our products could adversely affect our results of operations. There can be no assurance that the marketplace will support higher prices or that such prices and productivity gains will fully offset any commodity price increases in the future. We generally have not engaged in hedging transactions with respect to raw material purchases, but do enter into fixed price supply contracts at times. Future decisions not to engage in hedging transactions or ineffective hedging transactions might result in increased price volatility, potentially adversely impacting our profitability.
Our dependency upon regular deliveries of supplies from particular suppliers means that interruptions or stoppages in such deliveries could adversely affect our operations until arrangements with alternate suppliers could be made. Several of the raw materials and sub-assemblies used in the manufacture of our products currently are procured only from a single source. If any of these sole-source suppliers were unable or unwilling to deliver these materials for an extended period of time we might not be able to manufacture one or more products for a period of time, and our business could suffer. We might not be able to find acceptable alternatives, and any such alternatives could result in increased costs. Difficulties in the credit markets could adversely affect our suppliers’ access to capital and therefore their ability to continue to provide an adequate supply of the materials we use in our products.
The majority of our products are manufactured at a single facility or location, and the material damage or loss of, or partial or complete labor-related work stoppage at, one or more of these facilities or locations could prevent us from manufacturing some of the various products we sell.
We manufacture the majority of our products in only a single facility or location. If an event (including any weather or natural disaster-related event) occurred that resulted in material damage or loss of, or partial or complete labor-related work stoppage at, one or more of these manufacturing facilities or we lacked sufficient labor to fully operate the facility, we might be unable to transfer the manufacture of the relevant products to another facility or location in a cost-effective or timely manner, if at all. This potential inability to transfer production could occur for a number of reasons, including but not limited to a lack of necessary relevant manufacturing capability at another facility, or the regulatory requirements of the FDA or other governmental regulatory bodies. Such an event could materially negatively impact our financial condition, results of operations and cash flows.
Our international sales and operations are subject to risks and uncertainties that vary by country and which could have a material adverse effect on our business and/or results of operations. Compliance with international laws and regulations, import and export limitations, trade agreements, anti-corruption laws, and exchange controls may be difficult, burdensome and expensive.
International sales account for a significant percentrepresent approximately 32% of our total sales in fiscal 2017.2020. We anticipate that international sales will continue to represent a significant portion of our total sales in the future. In addition, we have multiple manufacturing facilities and third-party suppliers that are located outside of the U.S.United States. As a result, our international sales, as well as our sales in the U.S.United States, of products produced or sourced internationally, are subject to risks and uncertainties that can vary by country, such as political instability, economic conditions, foreign currency exchange rate fluctuations, changes in tax laws, regulatory and reimbursement programs and policies, and the protection of intellectual property rights. COVID-19 could contribute to these conditions or trigger legislative or regulatory responses that could directly or indirectly effect our business. In addition, our collections of international receivables are subject to economic pressures and the actions of some governmental authorities whothat have initiated various austerity measures to control healthcarehealth care and other governmental spending.
Unfavorable outcomes related to uncertain tax positions could result in significant tax liabilities.
We are subject to compliance with various laws and regulations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar anti-bribery laws in other jurisdictions, which generally prohibit companies and their intermediaries from making bribes or other improper payments to officials for the purpose of obtaining or retaining business. We are also subject to limitations on trade with persons in sanctioned countries. Our exposure to international markets increases the inherent risks of encountering such issues. While our employees, distributors and agents are required to comply with these laws and regulations, no assurance can be given that our training and internal policies and procedures will always protect us from violations of these laws, despite our commitment to legal compliance and corporate ethics. The failure to comply with these laws and regulations could subject us to severe fines and penalties that could have recordeda material impact on our financial condition, results of operations and cash flows.
We might not be successful in achieving expected operating efficiencies and sustaining or improving operating expense reductions, and might experience business disruptions and adverse tax benefits related to various uncertain tax positions taken or expected to be taken in a tax return.consequences associated with restructuring, realignment and cost reduction activities.
Over the past few years, we have initiated several restructuring, realignment and cost reduction initiatives. While we believe our positionsexpect to realize efficiencies from these actions, these activities might not produce the full efficiency and cost reduction benefits we expect. Further, such benefits might be realized later than expected, and the ongoing costs of implementing these measures might be greater than anticipated. If these measures are appropriate, the Internal Revenue Service ("IRS"), statenot successful or foreign tax authorities could disagree with our positions,sustainable, we might undertake additional realignment and cost reduction efforts, which could result in a significantfuture charges. Moreover, our ability to achieve our other strategic goals and business plans might be adversely affected and we could experience business disruptions with customers and elsewhere if our restructuring and realignment efforts and our cost reduction activities prove ineffective. These actions, the resulting costs, and potential delays or potential lower than anticipated benefits might also impact our foreign tax payment.positions and might require us to record tax reserves against certain deferred tax assets in our international business.
We are involved on an ongoing basis in claims, lawsuits and governmentalproceedings relating to our operations, as well as product liability or other liability claims that could expose us to adversejudgments or could adversely affect the sales of our products.
We are involved in the design, manufacture and sale of health care products, which face an inherent risk of exposure to product liability claims or if our products are alleged to have caused injury or are found to be unsuitable for their intended use. Amongst other claims, we are, from time to time, a party to claims and lawsuits alleging that our products have caused injury or death or are otherwise unsuitable. It is possible that we will receive adverse judgments in such lawsuits, and any such adverse judgments could be material. Although we carry insurance with respect to such matters, this insurance is subject to varying deductibles and self-insured retentions and might not be adequate to cover the full amount of any particular claim. In addition, any such claims could negatively impact the sales of products that are the subject of such claims or other products.
Materials and Manufacturing Risks
Increased prices for, or unavailability of, raw materials or sub-assembliesused in our products could adversely affect profitability or revenue. Specifically, our results of operations could be adversely affected by highprices for metals, fuel, plastics and other petroleum-based products, and the impact of U.S. and foreign legislation, regulations and trade agreements relating to the materials we import. We might not be able to attract, retainalso rely on single suppliers for the procurement of several raw materials and develop key personnel.sub-assemblies.
Our future performance dependsprofitability is affected by the prices and availability of the raw materials and sub-assemblies used in significant part upon the continued servicemanufacture of our executive officersproducts. These prices might fluctuate based on many factors beyond our control, including, but not limited to, changes in supply and demand, general economic conditions, including the ongoing impact of COVID-19, or a possible resurgence of COVID-19, labor costs, fuel related delivery costs, competition, and currency exchange rates. Our business is also subject to risks associated with U.S. and foreign legislation, regulations and trade agreements relating to the materials we import, including quotas, duties, tariffs or taxes, and other key personnel. The loss of the services of onecharges or more ofrestrictions on imports, which could adversely affect our executive officersoperations and our ability to import materials used in our products at current or increased levels. We cannot predict whether additional U.S. and foreign customs quotas, duties (including antidumping or countervailing duties), tariffs, taxes or other key employeescharges or restrictions, requirements as to where raw materials must be purchased, additional workplace regulations or other restrictions on our imports will be imposed in the future or adversely modified, or what effect such actions would have on our costs of operations. Future quotas, duties or tariffs may have a material adverse effect on our business, financial condition, results of operations or cash flows. Future trade agreements could also provide our competitors with an advantage over us, or increase our costs, either of which could have a material adverse effect on our business, prospects, financial condition, andresults of operations or cash flows.
Significant increases in the cost of raw materials or sub-assemblies that cannot be recovered through increased prices of our products could adversely affect our results of operations. Our success also depends on our continuing ability to attract, retain and develop highly qualified personnel, and as competition for such personnel is intense, thereThere can be no assurance that we can do sothe marketplace will support higher prices or that such prices and productivity gains will fully offset any commodity cost increases in the future.
A portion of our workforce is unionized, and we could face labordisruptions that would interfere with our operations.
Approximately 3% of our employees in the U.S. work under collective bargaining agreements. We are also subject to various collective bargaining arrangements or national agreements outside the U.S. covering approximately 16% of our employees. Although wegenerally have not recently experiencedengaged in hedging transactions with respect to raw material purchases but do enter into fixed price supply contracts at times. Future decisions not to engage in hedging transactions or ineffective hedging transactions might result in increased cost volatility, potentially adversely impacting our profitability.
Our dependency upon regular deliveries of supplies from certain suppliers means that interruptions or stoppages in such deliveries could adversely affect our operations until arrangements with alternate suppliers could be made. Several of the raw materials and sub-assemblies used to manufacture our products currently are procured only from a single source. If any significant work stoppages as a result of labor disagreements,these
single-source suppliers were unable or unwilling to deliver these materials for an extended time, we cannot ensure that such a stoppage willmight not occur in the future. Our labor contract atbe able to manufacture one or more products and our primary U.S. manufacturing facility expires in January 2019. Our ability to negotiate satisfactory new agreements or a labor disturbance at one of our principal facilitiesbusiness could have a material adverse effect on our operations.
suffer. We might not be successful in achieving expected operating efficienciesable to find acceptable alternatives, and sustaining or improving operating expense reductions, and might experience business disruptions and adverse tax consequences associated with restructuring, realignment and cost reduction activities.
Over the past few years we have initiated several restructuring, realignment and cost reduction initiatives. While we expect to realize efficiencies from these actions, these activities might not produce the full efficiency and cost reduction benefits we expect. Further,any such benefits might be realized later than expected, and the ongoing costs of implementing these measures might be greater than anticipated. If these measures are not successful or sustainable, we might undertake additional realignment and cost reduction efforts, whichalternatives could result in future charges. Moreover,increased costs.
The majority of our abilityproducts are manufactured at a single facility or location, and the material damage or loss of, or partial or complete labor-related work stoppage at, one or more of these facilities or locations could prevent us from manufacturing some of the various products we sell.
We manufacture most of our products in a single facility or location. If an event (including any weather or natural disaster or disruptions in connection with COVID-19) occurred that resulted in material damage or loss of, or partial or complete labor-related work stoppage at, one or more of these manufacturing facilities or we lacked sufficient labor to achieve our other strategic goals and business plansfully operate the facility, we might be adversely affected and weunable to transfer manufacturing of the relevant products to another facility or location in a cost-effective or timely manner, if at all. This potential inability to transfer production could experience business disruptions with customers and elsewhere if our restructuring and realignment efforts and our cost reduction activities prove ineffective.
These actions,occur for several reasons, including but not limited to a lack of necessary relevant manufacturing capability at another facility, or the resulting costs, and potential delaysregulatory requirements of the FDA or potential lower than anticipated benefits might alsoother governmental regulatory bodies. Such an event could materially negatively impact our foreign tax positionsfinancial condition, results of operations and might require us to record tax reserves against certain deferred tax assets in our international business.cash flows.
We are increasingly dependent on consistent functioning of our information technology and cybersecurity systems and if we are exposed to any intrusions or if we fail to maintain the integrity of our data, our business and our reputation could be materially adversely affected.
We are increasingly dependent on consistent functioning of our information technology and cybersecurity systems for our infrastructure and products. Our information systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards, integration of acquisitions, and the increasing need to protect patient, customer and supplier information. In addition, third parties might attempt to hack into our products or systems and might obtain proprietary information. If we fail to maintain or protect our information and cybersecurity systems and data integrity effectively, we could lose existing customers or suppliers, have difficulty attracting new customers or suppliers, have problems that adversely impact internal controls, have difficulty preventing, detecting, and controlling fraud, have disputes with customers and suppliers, have regulatory sanctions or penalties imposed, have increases in operating expenses, incur expenses or lose revenues as a result of a data privacy breach, or suffer other adverse consequences. Any significant breakdown, intrusion, interruption, corruption, or destruction of these systems, as well as any data breaches, could have a material adverse effect on our business.
We might be adversely affected by new regulations relating to conflict minerals.
The SEC has adopted rules regarding disclosure for public companies whose products contain conflict minerals (commonly referred to as tin, tantalum, tungsten and gold) whichthat originate from the Democratic Republic of the Congo (DRC)(“DRC”) and/or adjoining countries. The implementation of these requirements could adversely affect the sourcing, availability and pricing of materials used in the manufacturing of our products. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals used in our products. Since our supply chain is complex and multilayered, we might be unable to ascertain with sufficient certainty the origins for these minerals despite our due diligence procedures, which in turn might harm our reputation. We might also face difficulties in satisfying customers who might require that our products be certified as DRC conflict free, which could harm our relationships with these customers and/or lead to a loss of revenue. These requirements also could have the effect of limiting the pool of suppliers from which we source these minerals, and we might be unable to obtain conflict-free minerals at prices similar to the past, which could increase our costs and adversely affect our manufacturing operations and our profitability.
Employee and Pension Plan Risks
The assets in our pension plans are subject to market disruptions. In addition, our pension plans are underfunded.
Our primary pension plan invests in a variety of equity and debt securities subject to market risks. In addition, our pension plans are underfunded by $80.1 million based on our projected benefit obligation and fair value of plan assets as of September 30, 2020. Market volatility and disruption could cause declines in asset values or fluctuations in assumptions used to value our liability and expenses. If this occurs, we might need to make additional pension plan contributions and our pension expense in future years might increase.
A portion of our workforce is unionized, and we could face labordisruptions that would interfere with our operations.
Approximately 8% of our employees in the United States (including contingent workers) work under collective bargaining agreements. Approximately 65% of our employees outside the United States (including contingent workers) work under various collective bargaining arrangements and/or national trade union agreements. Although we have not recently experienced any significant work stoppages as a result of labor disagreements, we cannot ensure that such a stoppage will not occur in the future. The two collective bargaining agreements at our primary U.S. manufacturing facility expire in January 2021 and January 2022, respectively. Our inability to negotiate satisfactory new agreements or a labor disturbance at one of our principal facilities could have a material adverse effect on our operations.
We might not be able to attract, retain and develop key personnel.
Our future performance depends in significant part upon the continued service of our executive officers and other key personnel. The loss of the services of one or more of our executive officers or other key employees could have a material adverse effect on our business, prospects, financial condition and results of operations. Our success also depends on our continuing ability to attract, retain and develop highly qualified personnel, and as competition for such personnel is intense, there can be no assurance that we can do so in the future.
Cybersecurity and Information Technology Risks
The rationalization and transformation of our Enterprise Resource Planning (“ERP”) software solutions and other information technology systems could result in significant disruptions to our operations.
We are in the process of rationalizing and transforming our ERP software solutions and other complementary information technology systems, which is expected to be completed over the next several years. The implementation of these solutions and systems is highly dependent on the coordination of numerous software and system providers and internal business teams. We could experience changes in our operational processes and internal controls, which in turn could require significant capital investments and change management, including recruiting and training of qualified personnel. The interdependence of these solutions and systems is key to the successful completion of the initiatives. The failure of any one solution or system could have a significant impact on our business processes and information systems, including loss or corruption of data, delayed shipments, decreases in productivity as our personnel and third-party providers implement and become familiar with new systems, increased costs and lost revenues, which could have an adverse effect on our overall information technology infrastructure and as a result, could have an adverse impact on our business, results of operations and cash flows.
Difficulties in implementing new or upgraded information systems or system failures could also result in significant disruptions to our business, the incurrence of unanticipated expenses and the diversion of management’s attention from key strategic initiatives and could have a material adverse effect on our capital resources, financial condition, results of operations or cash flows.
We are increasingly dependent on the consistent functioning of our information technology and cybersecurity systems along with our information technology dependent product portfolios. If we are exposed to any intrusions, disruptions, corruption, or destruction, or if we fail to maintain the integrity of our systems or products, or the privacy of our data, our business and our reputation could be materially adversely affected.
We are increasingly dependent on consistent functioning of our information technology and cybersecurity systems for our infrastructure and software-based products. Our information systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, regulatory standards, integration of acquisitions, and the increasing need to protect patient, customer and supplier information. The new EU-wide General Data Protection Regulation (“GDPR”), which became applicable on May 25, 2018, imposes more stringent data protection requirements and provides for greater penalties for noncompliance. Our products include technologies that support connectivity and decision support infrastructure, which could be subject to intrusion, disruption or corruption and could impact the quality of care patients receive or the confidentiality of patient information. In addition, third parties might attempt to hack into our products or systems and might obtain proprietary information. As a result of the COVID-19 pandemic, we may face increased cybersecurity risks due to our reliance on internet technology and the number of our employees who are working remotely, which may create additional opportunities for cybercriminals to exploit vulnerabilities. If we fail to maintain or protect our information technology and cybersecurity systems and information technology dependent products effectively, we could lose existing customers or suppliers, have difficulty attracting new customers or suppliers, have problems that adversely impact internal controls, have difficulty preventing, detecting and controlling fraud, have disputes with customers and suppliers, have regulatory sanctions or penalties imposed, have increases in operating expenses, incur expenses or lose revenues as a result of a data privacy breach, or suffer other adverse consequences. Any significant breakdown, intrusion, interruption, corruption, or destruction of these systems, as well as any data breaches, could have a material adverse effect on our business.
Tax Risks
Unfavorable outcomes related to uncertain tax positions could result in significant tax liabilities.
We have recorded tax benefits related to various uncertain tax positions taken or expected to be taken in a tax return. While we believe our positions are appropriate, the U.S. Internal Revenue Service (“IRS”), state or foreign tax authorities could disagree with our positions, which could result in a significant tax payment.
General Risk Factors
Our stock price and trading volume has been, and may continue to be, volatile from time to time and we might experience continued fluctuations in the future that could negatively impact the value of our outstanding shares.
The market for our common stock has, from time to time, experienced significant price and volume fluctuations that might have been unrelated to our operating performance. We believe that a variety of factors could cause the price of our common stock to fluctuate, perhaps substantially, including:
•new, or changes in, analyst recommendations, guidelines or studies that could affect the use of our products;
•announcements and rumors of developments related to our business, including changes in reimbursement rates or regulatory requirements, proposed and completed acquisitions, or the industry in which we compete;
•published studies and reports relating to our products and markets in which we participate;
•quarterly fluctuations in our actual or anticipated operating results;
•general conditions in the U.S. or worldwide economy, including the impact of COVID-19 that has spread globally;
•our stock repurchase program;
•announcements of technological innovations;
•new products or product enhancements by us or our competitors;
•developments in patents or other intellectual property rights and litigation;
•developments in relationships with our customers and suppliers;
•the implementation of health care reform legislation and the adoption of additional reform legislation in the future; and
•the ability to or extent of integrating our acquisitions.
Any such fluctuations in the future could adversely affect the market price of our common stock.
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Item 1B. | UNRESOLVED STAFF COMMENTS |
Item 1B.UNRESOLVED STAFF COMMENTS
We have not received any comments from the staff of the SEC regarding our periodic or current reports that remain unresolved.
Item 2.PROPERTIES
The principal properties used in our operations are listed below. All facilities are suitable for their intended purpose, are being efficiently utilized and are believed to provide adequate capacity to meet demand for the next several years.
|
| | | | | | | |
| Location | Description and Primary Use | Owned/Leased |
| Acton, MA | Light manufacturing, development and distribution of health care equipment; products; Office administration | Leased |
| Batesville, IN | Manufacturing, development and distribution of health care equipment; products;
Office administration | Owned |
Beaverton, ORCary, NC | Development of health care equipment; products; Office administration | Leased |
Caledonia, MI | Manufacturing, development and distribution of surgical products;
Office administration
| Leased |
Cary, NC | Development of health care equipment;
Office administration
| Leased |
| Charleston, SC | Light manufacturing and distribution of health care equipment; products;
Office administration | Leased |
| Chicago, IL | Corporate headquarters; Office administration | Leased |
Coral Springs, FLIrvine, CA | Manufacturing and distribution of health care equipment;
Office administration
| Leased |
Corona, CA | Manufacturing, engineering and distribution of health care equipment | Leased |
Fishers, IN | Manufacturing of health care equipment | Leased |
Milwaukee, WI | Manufacturing, development and distribution of health care equipment; products;
Office administration | OwnedLeased |
| Milwaukee, WI | Manufacturing, development and distribution of health care products; Office administration | Owned |
| Sarasota, FL | Development and distribution of health care products; Office administration | Leased |
| St. Paul, MN | Office administration and distribution of health care equipmentproducts; Service center | Leased |
| Skaneateles Falls, NY | Manufacturing, development and distribution of health care equipment; products;
Office administration | Owned |
Sydney, AustraliaSuzhou, China | Distribution of healthcare equipment; Office administration | Leased |
Shanghai, China | Manufacturing and development of health care equipment;
Office administrationproducts | Leased |
| Taicang, China | Light manufacturing and distribution of health care equipmentproducts | Leased |
| Pluvigner, France | Manufacturing, development and distribution of health care equipment; products;
Office administration | Owned |
| Puchheim, Germany | Development of health care products; Office administration | Owned/Leased |
| Saalfeld, Germany | Manufacturing, development and distribution of health care equipment; products;
Office administration | Owned/LeasedOwned |
Saalfeld, Germany | Manufacturing, development and distribution of health care equipment;
Office administration
| Owned |
| Navan, County Meath, Ireland | Office administration | Owned |
| Bologna, Italy | Research and developmentDevelopment of heath care products; Office administration | Leased |
| Tijuana, Mexico | Manufacturing and distribution of health care equipment; products; Office administration | Leased
|
| Monterrey, Mexico | Manufacturing of health care equipmentproducts; Office administration | Owned |
| Amsterdam, Netherlands | Office administration | Leased |
Las Piedras, Puerto RicoSingapore | Manufacturing of surgical products | Owned |
Singapore | Research and developmentDevelopment of health care equipment;
products; Office administration | Leased |
Lulea,Luleå, Sweden | Manufacturing development and distribution of health care equipment; products;
Office administration | Owned |
In addition to the foregoing, we lease or own a number of other facilities, warehouse distribution centers, service centers, and sales offices and other facilities throughout the U.S.,United States, Australia, Canada, Western Europe, Mexico, Australia, Middle East, the Far East, and Latin America.
Item 3.LEGAL PROCEEDINGS
See Note 1316. Commitments and Contingencies of our Consolidated Financial Statements included under Part II, in Item 8 of this Form 10-K for information regarding legal proceedings in which we are involved.
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Item 4. | MINE SAFETY DISCLOSURES |
Item 4.MINE SAFETY DISCLOSURES
Not applicable.
PART II
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Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Shareholders
Our common stock is traded on the New York Stock Exchange under the ticker symbol "HRC". The closing price of our common stock on the New York Stock Exchange on November 14, 2017 was $76.93 per share. The following table reflects the range of highHRC and low selling prices of our common stock and cash dividends declared by quarter for each of the last two fiscal years.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2017 | | 2016 |
| Quarter Ended: | | High | | Low | | Cash Dividends Declared | | High | | Low | | Cash Dividends Declared |
| December 31 | | $ | 63.12 |
| | $ | 50.50 |
| | $ | 0.17 |
| | $ | 55.26 |
| | $ | 46.31 |
| | $ | 0.16 |
|
| March 31 | | $ | 71.22 |
| | $ | 55.04 |
| | $ | 0.18 |
| | $ | 51.11 |
| | $ | 42.99 |
| | $ | 0.17 |
|
| June 30 | | $ | 81.33 |
| | $ | 69.47 |
| | $ | 0.18 |
| | $ | 54.57 |
| | $ | 46.79 |
| | $ | 0.17 |
|
| September 30 | | $ | 84.65 |
| | $ | 71.91 |
| | $ | 0.18 |
| | $ | 62.17 |
| | $ | 49.42 |
| | $ | 0.17 |
|
Holders
As of November 14, 2017, there wereare approximately 42,50080,200 shareholders of record.
Dividends
The declaration and payment of cash dividends is at the sole discretion of our Board of Directors ("Board") and depends upon many factors, including our financial condition, earnings potential, capital requirements, alternative uses of cash, covenants associated with debt obligations, legal requirements, and other factors deemedconsidered relevant by our Board. We have paid cash dividends on our common stock every quarter since our initial public offering in 1971. We intend to continue to pay quarterly cash dividends comparable to those paid in the periods covered by these financial statements.the Consolidated Financial Statements included within Item 8 of Part II of this Form 10-K.
Issuer Purchases of Equity Securities
| | | | | | | | | | | | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased 1 | | Average
Price Paid
per Share | | Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans or Programs | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Programs 2 |
| July 1, 2020 - July 31, 2020 | 714 | | | $ | 111.80 | | | — | | | $ | 163.4 | |
| August 1, 2020 - August 31, 2020 | 50 | | | $ | 95.39 | | | — | | | $ | 163.4 | |
| September 1, 2020 - September 30, 2020 | 132 | | | $ | 82.49 | | | — | | | $ | 163.4 | |
| Total | 896 | | | | | — | | | |
1 Shares purchased in the quarter ended September 30, 2020 were in connection with employee payroll tax withholding for restricted stock distributions.
2 In September 2019, the Board approved an additional $170.0 million for share repurchases. The below table reflects the date of Board approval, the authorized dollar value of the shares to be repurchased under each approval and the availability to repurchase as of September 30, 2020. There is no expiration date or plans to terminate this program in the future.
| | | | | | | | | | | | | | | | | | | | | | | |
| Board Approval Date | Authorized Dollar Value | | Dollar Value of Shares Purchased Prior to Fiscal 2020 | | Dollar Value of Shares Purchased in Fiscal 2020 | | Availability to Purchase as of September 30, 2020 |
| | | | | | | |
| November 2017 | 150.0 | | | 102.5 | | | 47.5 | | | — | |
| September 2019 | 170.0 | | | — | | | 6.6 | | | 163.4 | |
| Totals | $ | 320.0 | | | $ | 102.5 | | | $ | 54.1 | | | $ | 163.4 | |
|
| | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Programs (2) |
| July 1, 2017 - July 31, 2017 | 544 |
| | $ | 82.80 |
| | — |
| | $ | 34.7 |
|
| August 1, 2017 - August 31, 2017 | 271,834 |
| | $ | 75.41 |
| | 265,160 |
| | $ | 14.7 |
|
| September 1, 2017 - September 30, 2017 | 78,012 |
| | $ | 73.74 |
| | — |
| | $ | 14.7 |
|
| Total | 350,390 |
| | | | 265,160 |
| | |
| |
(1) | Shares purchased during the quarter ended September 30, 2017 were in connection with the share repurchase program discussed below as well as employee payroll tax withholding for restricted and deferred stock distributions. |
| |
(2) | In September 2013, the Board approved an expansion of its previously announced share repurchase authorization to a total of $190.0 million. As of September 30, 2017, a cumulative total of $175.3 million had been used under the then existing authorization. On November 6, 2017, the Board of Directors approved an increase to the share repurchase program in an amount of $150.0 million, leaving the company approximately $165.0 million of availability under the share repurchase program as of such date. The plan does not have an expiration date and currently there are no plans to terminate this program in the future. |
21
Stock Performance Graph
The following graph compares the return on our common stock with that of Standard & Poor’s 500 Stock Index ("(“S&P 500"500”) and our peer groups* for each of the last five fiscal years ended September 30, 2017. Because the30. The composition of our current peer group (the "2017“2020 Peer Group"Group”) has not changed since the date of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016, we have included the data for the 20172019. The 2020 Peer Group as well as for our prior year’s peer group (the "2016 Peer Group") in the graph below. The changes reflected in the 2017 Peer Group were made in order to more closely alignis aligned with the peer group used in our most recent compensation study done for executive compensation purposes. The graph below assumes that the value of the investment in our common stock, the S&P 500 our 2017 Peer Group and our 20162020 Peer Group was $100 on October 1, 20122015 and that all dividends were reinvested.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| HRC | | $ | 100 | | | $ | 119 | | | $ | 142 | | | $ | 182 | | | $ | 202 | | | $ | 161 | |
| S&P 500 | | 100 | | | 113 | | | 131 | | | 152 | | | 155 | | | 175 | |
| 2020 Peer Group | | 100 | | | 132 | | | 153 | | | 198 | | | 214 | | | 261 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| HRC | | $ | 100 |
| | $ | 123 |
| | $ | 143 |
| | $ | 179 |
| | $ | 213 |
| | $ | 255 |
|
| S & P 500 | | $ | 100 |
| | $ | 117 |
| | $ | 137 |
| | $ | 133 |
| | $ | 151 |
| | $ | 175 |
|
| 2016 Peer Group | | $ | 100 |
| | $ | 107 |
| | $ | 121 |
| | $ | 129 |
| | $ | 170 |
| | $ | 200 |
|
| 2017 Peer Group | | $ | 100 |
| | $ | 106 |
| | $ | 120 |
| | $ | 135 |
| | $ | 176 |
| | $ | 205 |
|
| |
* | For purposes of the Stock Performance Graph above, our 2017*For purposes of the Stock Performance Graph above, our 2020 Peer Group is comprised of: Agilent Technologies, Inc., Avanos Medical, Inc. (formerly Halyard Health, Inc.), Bio-Rad Laboratories, Inc., Bruker Corporation, C.R. Bard, Inc., The Cooper Companies, Inc., Dentsply Sirona Inc., Edwards Lifesciences Corporation, Halyard Health, Inc., Hologic, Inc., Intuitive Surgical, Inc., Mednax, Inc., Patterson Companies, Inc., PerkinElmer, Inc., Quest Diagnostics Incorporated, St. Jude Medical, Inc., Steris plc, Teleflex, Incorporated, Varian Medical Systems, Inc. and Waters Corporation. |
Our 2016 Peer Group was comprised of: Bruker Corporation, C.R. Bard, Inc., The Cooper Companies, Inc., Dentsply Sirona, Inc., Edwards Lifesciences Corporation, Halyard Health, Inc., Hologic, Inc., Intuitive Surgical, Inc., Laboratory Corporation of America Holdings, Mednax, Inc., Patterson Companies, Inc., PerkinElmer, Inc., Quest Diagnostics Incorporated, St. Jude Medical,ResMed, Inc., Steris plc, Teleflex Incorporated, Varian Medical Systems, Inc., Waters Corporation and Waters Corporation.West Pharmaceutical Services, Inc.
Certain other information required by this item will be contained under the caption "Equity“Equity Compensation Plan Information"Information” in our definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on March 6, 2018,10, 2021, and such information is incorporated herein by reference.
PART II
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Item 6. | SELECTED FINANCIAL DATA |
Item 6.SELECTED FINANCIAL DATA
The following table presents our selected consolidated financial data for each of the last five fiscal years ended September 30. Refer to Note 2The data included below should be read together with Item 7 of our Consolidated Financial Statements included under Part II Item 8 of this Form 10-K, for disclosureManagement's Discussion and Analysis of business combinations for eachFinancial Condition and Results of the last three fiscal years. Also see Note 12Operations, and Item 8 of our Consolidated Financial Statements included under Part II Item 8 of this Form 10-K, for selected unaudited quarterly financial information for each of the last two fiscal years.Financial Statements and Supplementary Data, and related notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions, except per share data) | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Net revenue | $ | 2,881.0 | | | $ | 2,907.3 | | | $ | 2,848.0 | | | $ | 2,743.7 | | | $ | 2,655.2 | |
| Net income | 223.0 | | | 152.2 | | | 252.4 | | | 132.3 | | | 122.8 | |
| Net income attributable to common shareholders | 223.0 | | | 152.2 | | | 252.4 | | | 133.6 | | | 124.1 | |
| Net income attributable to common shareholders per basic share | 3.35 | | | 2.28 | | | 3.81 | | | 2.04 | | | 1.90 | |
| Net income attributable to common shareholders per diluted share | 3.32 | | | 2.25 | | | 3.73 | | | 1.99 | | | 1.86 | |
| Total assets | 4,671.1 | | | 4,919.0 | | | 4,360.0 | | | 4,528.7 | | | 4,262.4 | |
| Long-term obligations | 1,655.7 | | | 1,783.1 | | | 1,790.4 | | | 2,120.4 | | | 1,938.4 | |
| Cash flows from operating activities | 481.7 | | | 401.4 | | | 395.2 | | | 311.1 | | | 281.2 | |
| Capital expenditures | 105.9 | | | 73.4 | | | 89.5 | | | 97.5 | | | 83.3 | |
| Cash flows from investing activities | (131.2) | | | (249.0) | | | (82.4) | | | (389.4) | | | (97.7) | |
| Cash flows from financing activities | (695.0) | | | 304.7 | | | (356.6) | | | 70.6 | | | (141.9) | |
| Cash dividends per basic share | 0.87 | | | 0.83 | | | 0.78 | | | 0.71 | | | 0.67 | |
|
| | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Net revenue | $ | 2,743.7 |
| | $ | 2,655.2 |
| | $ | 1,988.2 |
| | $ | 1,686.1 |
| | $ | 1,716.2 |
|
| Net income | $ | 132.3 |
| | $ | 122.8 |
| | $ | 46.8 |
| | $ | 60.6 |
| | $ | 105.0 |
|
| Net income attributable to common shareholders | $ | 133.6 |
| | $ | 124.1 |
| | $ | 47.7 |
| | $ | 60.6 |
| | $ | 105.0 |
|
| Net income attributable to common shareholders per share - Basic | $ | 2.04 |
| | $ | 1.90 |
| | $ | 0.83 |
| | $ | 1.05 |
| | $ | 1.75 |
|
| Net income attributable to common shareholders per share - Diluted | $ | 1.99 |
| | $ | 1.86 |
| | $ | 0.82 |
| | $ | 1.04 |
| | $ | 1.74 |
|
| Total assets | $ | 4,528.7 |
| | $ | 4,262.4 |
| | $ | 4,457.6 |
| | $ | 1,751.3 |
| | $ | 1,586.8 |
|
| Long-term obligations | $ | 2,120.4 |
| | $ | 1,938.4 |
| | $ | 2,175.2 |
| | $ | 364.1 |
| | $ | 225.8 |
|
| Cash flows from operating activities | $ | 311.1 |
| | $ | 281.2 |
| | $ | 213.8 |
| | $ | 210.3 |
| | $ | 263.2 |
|
| Capital expenditures | $ | 97.5 |
| | $ | 83.3 |
| | $ | 121.3 |
| | $ | 62.7 |
| | $ | 65.3 |
|
| Cash flows from investing activities | $ | (389.4 | ) | | $ | (97.7 | ) | | $ | (1,756.4 | ) | | $ | (294.5 | ) | | $ | (58.6 | ) |
| Cash flows from financing activities | $ | 70.6 |
| | $ | (141.9 | ) | | $ | 1,642.7 |
| | $ | 63.8 |
| | $ | (161.5 | ) |
| Cash dividends per share | $ | 0.7100 |
| | $ | 0.6700 |
| | $ | 0.6325 |
| | $ | 0.5950 |
| | $ | 0.5250 |
|
| |
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-K contains "forward-looking statements" within the meaning of the federal securities laws with respect to general economic conditions, our financial condition, results of operations, cash flows and business and our expectations or beliefs concerning future events, including the demand for our products, the ability to operate our manufacturing sites at full capacity, future supplies of raw materials for our operations, share repurchases, international market conditions, expectations regarding our liquidity, our capital spending, plans for future acquisitions and divestitures, and our operating plans. These forward-looking statements can generally be identified by phrases such as we or our management "expects," "anticipates," "believes," "estimates," "intends," "plans to," "ought," "could," "will," "should," "likely," "appears," "projects," "forecasts," "outlook" or other similar words or phrases. There are inherent risks and uncertainties in any forward-looking statements. We caution readers not to place undue reliance on any forward-looking statements.
Our forward-looking statements are based on management's expectations and beliefs as of the time this Form 10-K is filed with the SEC or, with respect to any document incorporated by reference, as of the time such document was prepared. Although we believe that our expectations are reasonable, we can give no assurance that these expectations will prove to have been correct, and actual results may vary materially. These factors include those described in Part I, Item 1A "Risk Factors" of this Form 10-K. Except as required by law, we undertake no obligation to update, amend or clarify any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or any other changes.
Overview
Hill-Rom Holdings, Inc. ("(“we," "us,"” “us,” or "our"“our”), is a leading global medical technology company with more thanleader whose approximately 10,000 employees worldwide. We partner with health care providers in more than 100 countries, across all care settings, by focusing on patient care solutions that improve clinical and economic outcomes in five core areas: Advancing Mobility, Wound Care and Prevention, Patient Monitoring and Diagnostics, Surgical Safety and Efficiency and Respiratory Health. Hill-Rom's people, products, and programs work towards one mission: Every day, around the world, we enhancehave a single purpose: enhancing outcomes for patients and their caregivers.caregivers by Advancing Connected Care™. Around the world, our innovations touch over 7 million patients each day. Our products and services help enable earlier diagnosis and treatment, optimize surgical efficiency and accelerate patient recovery while simplifying clinical communication and shifting care closer to home. We make these outcomes possible through connected smart beds, patient lifts, patient assessment and monitoring technologies, caregiver collaboration tools, respiratory health devices, advanced equipment for the surgical space and more, delivering actionable, real-time insights at the point of care.
Industry Trends
The unprecedented COVID-19 global pandemic placed significant pressure on health care providers globally. Not only did health systems manage the real and anticipated influx of infectious patients through emergent response, they were required to address a variety of factors including ensuring appropriate critical care capacity, facilitating supply chain needs for personal protective equipment (“PPE”) and high demand medical devices and addressing ongoing staffing challenges. The resulting focus on COVID-19 patients resulted in mandates to reduce elective surgeries, effectively reducing a key health system revenue source, placing financial pressure on providers. We expect consumers to continue to be wary about visiting healthcare facilities, driving continued demand for telehealth and care in lower acuity settings.
We see the pandemic representing a force which has and will continue to accelerate several global health care trends:
Telehealth and Remote Care. COVID-19 essentially accelerated the need and greater acceptance of virtual care. Although available for some time, the adoption of telehealth virtual visits has gained wide acceptance from patients, providers and more importantly payers. We see this trend continuing and the environment is ripe for continued growth. Additionally, with shortages of physician specialties, telemedicine (i.e., eICU) within the walls of the hospitals will also increase due to the need for access and the desire for lower cost care.
Digital Transformation.Connected care cannot only take place through virtual means, but also through the digital transformation of connected devices and decision support tools. Providers will utilize communication tools, sensors, wearables, artificial intelligence and predictive analytics to generate meaningful and real-time information about patients to maximize clinical insights, improve workflow, enable earlier intervention and enhance the patient’s experience.
Lower Cost Care Settings. Growing pressure on health care costs are resulting in a continued migration of care from the acute care hospital into lower cost care settings. We believe that this trend increases the demand for more solutions to care for these patients, many of whom are medically complex, in lower acuity settings such as ambulatory surgery centers, outpatient centers and the home. Opportunities include improved medical technologies, remote monitoring, communication solutions and information technologies.
Provider Consolidation. Economic The financial pressures experienced via COVID-19 place an even greater chasm between providers that can weather hardship and those that cannot. We expect economic considerations, competition and other factors have ledwill lead to ongoing consolidation of customers and the centralization of purchasing decision-making. We believe this has influenced the criteria customers use to evaluate the value proposition offered by Hill-Rom for various product and service offerings.customers.
Emerging Markets Healthcare Access. While industry growth rates in more mature geographic regions such as western and northern Europe and Japan have moderated, in many other geographic markets, the relative spending on health care is expanding. We expect long-term increasing demand for medical technologies as a result. New hospital construction and hospital refurbishments are expected in regions such as Latin America, the Middle East and many parts of Asia.
Information and Connectivity. Patient and provider demand for health care products and services will continue to grow over the long-term as a result of a number of factors, including an aging population, longer life expectancies, and an increasing number of sicker patients across all care settings, including hospitals, extended care facilities and in the home. In contrast, however, health care providers are under continued pressure to improve efficiency and control costs. As a result, utilizing connected devices to generate meaningful and real time information about patients and products has become critical to providing quality healthcare, enhancing patient experience, lowering length of stay and driving efficiencies across the healthcare continuum.
Economic and Clinical Value.We believe an increasing emphasis is being placed within hospitals to assureThe overriding importance of improved quality of care through increased accountability and public disclosure. As an example, several pieces of legislation have been enacted overmetrics will maintain the past few yearsfocus on improving outcomes related to address these areas including the "pay for performance" initiative by the Centers for Medicare and Medicaid Services ("CMS") which aims to better align reimbursement with improved patient outcomes and the reduction of adverse events including bedsores (or pressure ulcers), ventilator associated pneumonia,injuries, patient falls, deep vein thrombosispatient deterioration and patient entrapment.sepsis. Hospitals may experience reduced reimbursement for hospital-acquired adverse events, creating a stronger connection between these adverse events and hospital revenue levels. Therefore, we believe that health care providers will seek to do business with partners that can demonstrate improved clinical, and consequently, economic outcomes.
Lower CostDemand for Health Care Settings. Growing pressures on healthcare costs are resulting in a migration of care from the acute care hospital into lower cost care setting. We believe that this trend increases theServices. Patient and provider demand for more solutionshealth care products and services is expected to care for thesecontinue to grow over the long-term as a result of many factors, including an aging population and an increasing number of chronic patients in lower acuityacross all care settings, including improved medical technologies, communication toolshospitals, extended care facilities, outpatient settings and information technologies.in the home. At the same time, health care providers will also be under continued pressure to improve efficiency and control costs.
Strategic Priorities
We believe we have aligned our strategic priorities to accommodate the evolving global healthcarehealth care landscape.
Accelerating Growth Across Care SettingsAdvancing category leadership with differentiated solutions and Markets. As we continue to diversify our portfolio, we are extending our presence into newinnovation. Health care settings and markets. We are expanding internationally, entering new product areas and accelerating revenue contributions from new products, and expect our U.S. and international businesses to be key contributors to solid growth. Among other measures, Hill-Rom established Enterprise Accounts teams in the U.S. and an integrated international commercial organization to serve as an adjunct to our traditional sales representatives, and better address customer needs for products and services that deliver solutions for quality patient care. With the acquisition of Welch Allyn, we also added a significant distributor component serving the U.S. primary care setting.
Innovation.Due to the growing population of sick patients, health care systems today are challenged to treat the rising incidence of complex diseases and conditions while also reducing costs, increasing efficiency and improving efficiency. This trend increases thepatient outcomes. We are well positioned to meet demand for our innovative, differentiated solutions that drive a clear value proposition for customers. We are executing on a strong pipeline of impactful medical technologies, communication tools and information technologies to build on our category leadership and we are constantly innovating to ensure doctors, nurses andprovide caregivers have the products they needand solutions needed to protect patients, speed recovery,enhance patient care and manageoutcomes.
Expanding internationally and penetrating emerging markets.International markets continue to expand access to health care for their conditions.
Transforming Our Portfolio.We have made several acquisitionsgrowing populations, presenting significant opportunity to expand our presence with our differentiated solutions. By focusing on product categories and this continuesinnovations with the highest growth potential, coupled with our ‘One Hillrom’ approach to be a key component of our strategy going forward. We have also recently divested non-strategic assets from our portfolio. We believe these actions are helping optimize our portfolio and enhance our focus on long-term higher marginstrong global channel and footprint, we will continue to enhance our international presence, penetrate emerging markets, and drive accelerated growth.
Driving Operational Execution.Transforming the portfolio with select business development and optimization initiatives. Business development has played an important role in our transformation in the last several years, by strengthening and diversifying the portfolio. We will continue to undertakedeploy capital on opportunities that align with our strategy and meet our financial objectives. We enhanced our growth prospects by divesting non-strategic assets and redirecting resources to advance category leadership in higher-growth, higher-margin opportunities. We will continue to evaluate and pursue opportunities that further optimize our business portfolio.
Driving operational execution and strong financial performance. Investing to support future growth is key to our success, while maintaining strong financial discipline and operational performance. We are executing on a variety of initiatives to improve ourdrive operating efficiency,efficiencies, including consolidation of our manufacturing footprint, realignment and optimization of business processes, and lowering sourcing costs. We believe our operating expensescosts, improving productivity, and margins will be positively impacted by these actions. We may utilize savingsoptimizing business processes. Savings generated from these actions will provide flexibility to reinvest in strategic priorities to drive growth, including continued innovation to drive category leadership and investments to further our growth prioritiesinternational presence, particularly in emerging markets.
The Impacts of COVID-19 on Hillrom
COVID-19 has impacted global economies as travel, leisure and improvediscretionary consumer spending has reduced significantly causing companies to make commensurate changes to their investments, human capital, and financial outlooks. The United States and countries around the world continue to take precautionary and preventive measures to reduce the spread of COVID-19.
Revenues and Customers
Hillrom experienced significant fluctuations in demand across its portfolio of products as health care customers prioritized the treatment of patients diagnosed with COVID-19. We experienced a significant increase in demand for select products within Patient Support Systems and Front Line Care used in the treatment of COVID-19 patients. For the fiscal year ended September 30, 2020, we recognized revenue of approximately $180 million related to non-recurring demand for respiratory health ventilators, intensive care unit and med-surg beds and specialty surfaces. We also experienced lower revenue in our profitability.care communications business and Surgical Solutions business due to project delays resulting from hospital access restrictions and delays in elective surgical procedures. Additionally, a decline in doctor office visits due to COVID-19 restrictions and concerns resulted in lower demand for our products used within the physician practice setting.
Risk FactorsFor fiscal 2021, we expect hospitals and physician practices to advance toward more normal operating activities over the course of our fiscal year with intermittent and localized impacts from COVID-19. We anticipate lower demand for products used to treat COVID-19 as demand is less widespread than experienced early in the pandemic. We also anticipate a gradual recovery in the demand for other products, such as information technologies and software solutions in Patient Support Systems, patient diagnostic tools in Front Line Care and operating room infrastructure in Surgical Solutions. Our outlook for fiscal 2021 can be affected by efforts across the world to control the spread of COVID-19 through improved testing and contact tracing and the development and availability of an effective vaccine.
Operations and Workforce
We experienced no significant supply chain constraints nor significant increases in supply costs, and we were able to secure raw materials and components for manufacturing products in high demand due to COVID-19.
Our abilityproductions facilities have remained open and employment levels have remained consistent. Many employees in our administrative functions have effectively worked remotely since mid-March. We have implemented the necessary precautions to sustain long-term growthallow our employees to work safely and successfullyeffectively in our manufacturing and service facilities.In other areas of the business, we have adapted our processes and used technology to continue to effectively execute the strategies discussed above depends in part on our abilitystrategic priorities as well as daily operating activities.
We will continue to manageassess our workforce requirements in response to evolving customer demand related to COVID-19.
As disclosed in Note 1. Summary of Significant Accounting Policies, we benefited from government programs within an increasingly competitivethe various jurisdictions in which we operate in the form of subsidies, incentives, cost relief and regulated environmentpayment deferrals. Management will continue to evaluate these opportunities as well as the related requirements or restrictions to support our operations and workforce in a manner that allows us to addresscontinue to operate efficiently and effectively.
For further discussion, see the other risk factors described infactor within Item 1A1. Business, Item 1.A Risk Factors, entitled “Our business, results of operations, financial condition and prospects could be materially and adversely affected by the ongoing COVID-19 pandemic and the related effects on this Form 10-K.public health.”
Use of Non-GAAP Financial Measures
The accompanying Consolidated Financial Statements including theand related notes are presented in accordance with accounting principles generally accepted in the U.S. ("GAAP"United States (“GAAP”). WeIn addition to the results reported in accordance with GAAP, we routinely provide grossoperating margin, operating marginincome before taxes, income tax expense and earnings per diluted share results on an adjusted basis because the Company’s management believesas we believe these measures contribute to anthe understanding of our financial performance, provide additional analytical tools to understand our results from core operations and reveal underlying operating trends. These measures exclude strategic developments, acquisition and integration costs specialand related fair value adjustments, gains and losses associated with disposals of businesses or significant product lines, regulatory costs related to updating existing product registrations to comply with the European Medical Device Regulations, Special charges oras described in Note 10. Special Charges of this Form 10-K, the transitional impacts of the U.S. Tax Cuts and Jobs Act (the “Tax Act”), changes in tax accounting methods, and other tax law changes as described in Note 11. Income Taxes of this Form 10–K, expenses associated with these tax items, the impacts of significant litigation matters, certain impacts of the COVID-19 pandemic and other unusual events. The CompanyWe also excludesexclude expenses associated with the amortization of purchased intangible assets associated with prior business acquisitions.assets. These adjustments are made to allow investors to evaluate and understand operating trends excluding the non-cashtheir impact of acquired intangible amortization on operating income and earnings per diluted share.
Management uses these measures internally for planning, forecasting and evaluating the performance of the business. Investors should consider these non-GAAP measures in addition to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP.
In addition, we present certain results on a constant currency basis. Constant currency informationbasis, which compares results between periods as if foreign currency exchange rates had remained consistent period-over-period. We monitor sales performance on a constant currencyan adjusted basis that eliminates the positive or negative effects that result from translating international sales into U.S. dollars. We calculate constant currency by applying the foreign currency exchange rate for the prior period to the local currency results for the current period. We believe that evaluating growth in net revenue on a constant currency basis provides an additional and meaningful assessment to both management and investors.
Results of Operations
Fiscal Year Ended September 30, 20172020 Compared to the Fiscal Year Ended September 30, 20162019
In this section, we provide an overview of our results of operations. We disclose segment information that is consistent with the way in which management operates and views the business. During our first quarter
Net Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | U.S. | | OUS |
| (In millions) | Year Ended September 30 | | Change As
Reported | | Constant
Currency | | Change As
Reported | | Change As
Reported | | Constant
Currency |
| 2020 | | 2019 | | | | | |
| Revenue: | | | | | | | | | | | | | |
| Product sales and service | $ | 2,571.2 | | | $ | 2,615.0 | | | (1.7) | % | | (1.3) | % | | (6.0) | % | | 8.0 | % | | 9.3 | % |
| Rental revenue | 309.8 | | | 292.3 | | | 6.0 | % | | 6.1 | % | | 7.4 | % | | (3.1) | % | | (2.5) | % |
| Total net revenue | $ | 2,881.0 | | | $ | 2,907.3 | | | (0.9) | % | | (0.5) | % | | (4.4) | % | | 7.5 | % | | 8.7 | % |
| | | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | | |
| Patient Support Systems | $ | 1,539.1 | | | $ | 1,490.5 | | | 3.3 | % | | 3.6 | % | | (0.1) | % | | 14.1 | % | | 15.6 | % |
| Front Line Care | 1,025.0 | | | 978.1 | | | 4.8 | % | | 5.2 | % | | 1.0 | % | | 14.4 | % | | 16.0 | % |
| Surgical Solutions | 316.9 | | | 438.7 | | | (27.8) | % | | (27.6) | % | | (43.1) | % | | (12.1) | % | | (11.9) | % |
| Total net revenue | $ | 2,881.0 | | | $ | 2,907.3 | | | (0.9) | % | | (0.5) | % | | (4.4) | % | | 7.5 | % | | 8.7 | % |
| | | | | | | | | | | | | |
| OUS - Outside of the United States | | | | | | | | | | | | |
Consolidated Revenue
Product sales and service revenue decreased 1.7% on a reported basis, and 1.3% on a constant currency basis for the fiscal 2017, we changed our segment reportingyear ended September 30, 2020 compared to reflect changes in our organizational structure and management’s operation and viewthe fiscal year ended September 30, 2019. The decrease was the result of the business. We combineddisposition of the prior year North Americasurgical consumable products business in August 2019 and lower revenues as a result of COVID-19 within Surgical Solutions. This decrease was partially offset by increased global revenue for Patient Support Systems segment and InternationalFront Line Care, which primarily reflects the net impacts of COVID-19.
Rental revenue increased 6.0% on a reported basis, and 6.1% on a constant currency basis for the fiscal year ended September 30, 2020 compared to the fiscal year ended September 30, 2019. The increase was due to higher deployment of the Patient Support Systems segment into a new segment called Patient Support Systems. Our rental portfolio, which was primarily driven by COVID-19 patient needs.
Business Segment Revenue
Patient Support Systems segment now also includes an additional component of global marketing spend that was previously unallocated. The prior year segment information included in this Form 10-K has been updated to reflect these changes. Our revised operating structure contains the following reporting segments:
Patient Support Systems – globally provides our specialty bed frames and surfaces and mobility solutions, as well as our clinical workflow solutions which specializes in software and information technologies to improve care and deliver actionable insight to caregivers and patients.
Front Line Care – globally provides respiratory care products, and sells medical diagnostic monitoring equipment and a diversified portfolio of physical assessment tools that assess, diagnose, treat, and manage a wide variety of illnesses and diseases.
Surgical Solutions – globally provides products that improve surgical safety and efficiency in the operating room including tables, lights, pendants, positioning devices and various other surgical products and accessories.
Net Revenue
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | U.S. | | OUS |
| | Year Ended
September 30 | | Change As Reported | | Constant Currency | | Change As Reported | | Change As Reported | | Constant Currency |
| | 2017 | | 2016 | | | | | |
| Revenue: | | | | | | | | | | | | | |
| Product sales and service | $ | 2,358.1 |
| | $ | 2,263.4 |
| | 4.2 | % | | 4.6 | % | | 4.7 | % | | 3.2 | % | | 4.4 | % |
| Rental revenue | 385.6 |
| | 391.8 |
| | (1.6 | )% | | (1.3 | )% | | (1.1 | )% | | (5.1 | )% | | (2.6 | )% |
| Total revenue | $ | 2,743.7 |
| | $ | 2,655.2 |
| | 3.3 | % | | 3.7 | % | | 3.6 | % | | 2.7 | % | | 4.0 | % |
| | | | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | | |
| Patient Support Systems | $ | 1,423.9 |
| | $ | 1,437.2 |
| | (0.9 | )% | | (0.6 | )% | | 0.2 | % | | (3.9 | )% | | (2.8 | )% |
| Front Line Care | 885.3 |
| | 809.7 |
| | 9.3 | % | | 9.7 | % | | 8.0 | % | | 12.8 | % | | 14.0 | % |
| Surgical Solutions | 434.5 |
| | 408.3 |
| | 6.4 | % | | 7.2 | % | | 8.1 | % | | 4.7 | % | | 6.4 | % |
| Total revenue | $ | 2,743.7 |
| | $ | 2,655.2 |
| | 3.3 | % | | 3.7 | % | | 3.6 | % | | 2.7 | % | | 4.0 | % |
| | | | | | | | | | | | | | |
| OUS - Outside of the U.S. | | | | | | | | | | | | | |
Consolidated Revenue
Consolidated revenue increased 3.3% on a reported basis and 3.7%3.6% on a constant currency basis for the fiscal year ended September 30, 2017 with2020 compared to the fiscal year ended September 30, 2019. The increase was driven primarily by global sales growth in both thefor intensive care unit and med-surg beds and increased U.S. and OUS. This growthrental revenues primarily due to COVID-19, as well as recent acquisitions. The increase was impacted by the acquisition of Mortara in February 2017, partially offset by lower revenue in our care communications business due to project delays resulting from hospital access restrictions. Revenue for the dispositionfiscal year ended September 30, 2020 does not reflect approximately $2.4 million of our Architectural Products and Völker businessesrevenue that was eliminated in fiscal 2017 and the disposition of our productsfair value purchase accounting adjustments to deferred revenue related to our perinatal data management system in fiscal 2016. All three dispositions were within our Patient Support Systems segment. Excluding the impact of businesses we recently divested and the impact of the Mortara acquisition, our consolidated revenue grew approximately 3% on a constant currency basis.recent acquisitions.
Product sales and serviceFront Line Care revenue increased 4.2%4.8% on a reported basis and 4.6%5.2% on a constant currency basis for the fiscal year ended September 30, 2017,2020 compared to the fiscal year ended September 30, 2019. The increase was primarily due to growth in our Surgical Solutions segmentdriven by non-invasive ventilator sales under U.S. federal and state government contracts as well as our acquisition of Mortara. This growth wasinternationally in patient monitoring and physical assessment tools primarily related to COVID-19. The increases were partially offset by declines from businesses we recently divested within our Patient Support Systems segment.a decline in doctor office visits due to COVID-19 restrictions that resulted in lower demand for patient diagnostic tools, such as vision screening and cardiology.
RentalSurgical Solutions revenue decreased 1.6%27.8% on a reported basis or 1.3%and 27.6% on a constant currency basis for the fiscal year ended September 30, 2017, primarily due2020 compared to volume declines in our third party rental business.
Business Segment Revenue
Patient Support Systems revenue decreased 0.9% on a reported basis and 0.6% on a constant currency basis for the fiscal year ended September 30, 2017 compared2019, predominantly due to the prior year. Fiscal 2017 was impacted by lower revenue from businesses we recently divested. Excludingdisposition of the impactsurgical consumable products business in August 2019. Additionally, global revenues declined as a result of these completed divestitures from all periods, revenue grew by approximately 3% on a constant currency basis for the year ended September 30, 2017 led by growth in the U.S.COVID-19-related hospital access restrictions that delayed capital projects and Middle East.
Front Line Care revenue increased 9.3% on a reported basis and 9.7% on a constant currency basis for the year ended September 30, 2017 compared to the prior year, primarily due to growth in Europe and Asia Pacific from our Welch Allyn business,installations, as well as additional revenue from our Mortara acquisition in February 2017.deferred patient elective surgical procedures. These decreases were partially offset by higher demand for integrated operating tables during the first six months of fiscal 2020.
Surgical Solutions revenue increased 6.4% on a reported basis and 7.2% on a constant currency basis for the year ended September 30, 2017 compared to the prior year, mainly due to double digit growth in surgical equipment and patient positioning businesses, which included strong OUS growth across most regions and new product growth in the U.S.
Gross Profit
| | | | | | | | | | | | | | | |
| (In millions) | | | Year Ended September 30 |
| | | | | | 2020 | | 2019 |
Gross Profit 1 | | | | | | | |
| Product sales and service | | | | | $ | 1,311.3 | | | $ | 1,284.3 | |
| Percent of Related Net Revenue | | | | | 51.0 | % | | 49.1 | % |
| | | | | | | |
| Rental | | | | | 163.8 | | | 140.7 | |
| Percent of Related Net Revenue | | | | | 52.9 | % | | 48.1 | % |
| | | | | | | |
| Total Gross Profit | | | | | $ | 1,475.1 | | | $ | 1,425.0 | |
| Percent of Total Net Revenue | | | | | 51.2 | % | | 49.0 | % |
1 Gross Profit is calculated as net product sales and service revenue and rental revenue less the related cost of goods sold or rental expenses as disclosed on the face of the Statements of Consolidated Income. |
|
| | | | | | | |
| | Year Ended September 30 |
| | 2017 | | 2016 |
| Gross Profit | | | |
| Product sales and service | $ | 1,122.3 |
| | $ | 1,054.0 |
|
| Percent of Related Revenue | 47.6 | % | | 46.6 | % |
| | | | |
| Rental | 198.3 |
| | 203.0 |
|
| Percent of Related Revenue | 51.4 | % | | 51.8 | % |
| | | | |
| Total Gross Profit | $ | 1,320.6 |
| | $ | 1,257.0 |
|
| Percent of Total Revenue | 48.1 | % | | 47.3 | % |
Product sales and service gross marginprofit increased 100 basis pointsby $27.0 million or 2.1% for the fiscal year ended September 30, 2017. The prior year included an impact of $19.9 million for the inventory step-up associated with the Welch Allyn acquisition2020 compared to the current year impact of $4.8 million for inventory step-up associated with the Mortara acquisition. Excluding these items, product sales and service gross margin increased 30 basis points for thefiscal year ended September 30, 2017,2019. The increase in gross profit was primarily driven by increased sales volume of higher margin products in Patient Support Systems and Front Line Care, which primarily reflects the impact on demand for products used to treat COVID-19 patients. The increase in gross profit can also be attributed to strategic changes including recent acquisitions and the disposition of the surgical consumable products business in August 2019, as well as reduced costs due to product miximproved efficiency in manufacturing and supply chain improvements.service activities.
Rental gross margin decreased 40 basis pointsprofit increased by $23.1 million or 16.4% for the fiscal year ended September 30, 20172020 compared to fiscal year ended September 30, 2019. The increase in rental gross profit was driven by higher volumes and lower servicing costs associated with the prior yearPatient Support Systems rental portfolio due to reduced leverage of our fleet and field service infrastructure driven by lower revenue.increased rental durations for COVID-19 patients.
| | | | Year Ended September 30 | |
| (In millions) | | (In millions) | | Year Ended September 30 |
| | 2017 | | 2016 | | | 2020 | | 2019 |
| Research and development expenses | $ | 133.7 |
| | $ | 133.5 |
| Research and development expenses | | $ | 136.5 | | | $ | 139.5 | |
| Percent of Total Revenue | 4.9 | % | | 5.0 | % | |
| Percent of Total Net Revenue | | Percent of Total Net Revenue | | 4.7 | % | | 4.8 | % |
| | | | | | | |
| Selling and administrative expenses | $ | 876.1 |
| | $ | 853.3 |
| Selling and administrative expenses | | $ | 820.4 | | | $ | 818.6 | |
| Percent of Total Revenue | 31.9 | % | | 32.1 | % | |
| Percent of Total Net Revenue | | Percent of Total Net Revenue | | 28.5 | % | | 28.2 | % |
| | Acquisition-related intangible asset amortization | | Acquisition-related intangible asset amortization | | $ | 109.0 | | | $ | 122.4 | |
| Percent of Total Net Revenue | | Percent of Total Net Revenue | | 3.8 | % | | 4.2 | % |
Research and development expenses remained relatively flatdecreased by $3.0 million, or 2.2%, for the fiscal year ended September 30, 20172020 compared to the prior year.fiscal year ended September 30, 2019 due to the timing of projects. As a percentage of revenue, researchResearch and development expenses have been consistent year over year.remained relatively consistent.
As a percentage of total revenue, selling and administrative expenses decreased during the year to date period compared to the prior year. Selling and administrative expenses include $132.7remained relatively flat for the fiscal year ended September 30, 2020 compared to the fiscal year ended September 30, 2019. Selling and administrative expenses increased by $1.8 million, of acquisition-related intangible asset amortization,or 0.2%, predominantly due to increased information technology costs, investments in emerging markets and higher compensation costs related to annual merit increases. The increase is partially offset by lower travel expenses due to COVID-19 and lower acquisition and integration costs and certain litigation chargesduring fiscal 2020.
Acquisition-related intangible asset amortization decreased by $13.4 million, or 10.9%, for the fiscal year ended September 30, 2017 and $114.8 million for2020 compared to the fiscal year ended September 30, 2016. Excluding these items, selling and administrative expenses decreased 70 basis points as a percentage2019 primarily due to the disposition of revenuethe surgical consumable products business in August 2019, offset partially by amortization of acquired intangibles as a result of disciplined cost management.recent acquisitions. See Note 4. Goodwill and Intangible Assets for additional information.
Business Segment Divisional Income
|
| | | | | | | | | | |
| | Year Ended September 30 | | Change As Reported |
| | 2017 | | 2016 | |
| Divisional income: | |
| | |
| | |
| Patient Support Systems | $ | 249.6 |
| | $ | 245.2 |
| | 1.8 | % |
| Front Line Care | 231.8 |
| | 202.1 |
| | 14.7 | % |
| Surgical Solutions | 42.5 |
| | 46.2 |
| | (8.0 | )% |
Patient Support Systems divisional income increased 1.8% for the year ended September 30, 2017 primarily due to lower operating expenses and an increase in margins from product mix and supply chain improvements.
Front Line Care divisional income increased 14.7% for the year ended September 30, 2017 compared to the prior year as a result of our Mortara acquisition and higher margins from supply chain improvements.
Surgical Solutions divisional income decreased 8.0% for the year ended September 30, 2017 compared to the prior year, primarily due to increased operating expenses and lower margins due to increases in supply chain costs.
Special Charges and Other
| | | | | | | | | | | | | | | |
| (In millions) | | | Year Ended September 30 |
| | | | | | 2020 | | 2019 |
| Special charges | | | | | $ | 41.5 | | | $ | 28.4 | |
| | | | | | | |
| Interest expense | | | | | $ | (74.0) | | | $ | (89.6) | |
| Loss on extinguishment of debt | | | | | (15.6) | | | (3.3) | |
| Investment income (expense) and other, net | | | | | (6.9) | | | (14.6) | |
|
| | | | | | | |
| | Year Ended September 30 |
| | 2017 | | 2016 |
| Special charges | $ | 37.4 |
| | $ | 39.9 |
|
| | | | |
| Interest expense | $ | (88.9 | ) | | $ | (90.4 | ) |
| Loss on extinguishment of debt | $ | — |
| | $ | (10.8 | ) |
| Investment income and other, net | $ | (1.5 | ) | | $ | 9.2 |
|
In connection with various transformative initiatives, restructuring and exit activities, and organizational changes to improve our business alignment and cost structure we recognized specialSpecial charges of $37.4 million and $39.9$41.5 million for the fiscal year to date periods ended September 30, 2017 and 2016.2020, compared to $28.4 million for the fiscal year ended September 30, 2019. These charges relaterelated to the initiatives described in Note 8 of our Consolidated Financial Statements.10. Special Charges.
Interest expense was lower indecreased $15.6 million, or 17.4%, for the fiscal year to date period ended September 30, 2017 mainly2020 compared to the fiscal year ended September 30, 2019 due to lower borrowing rates from the improved termsrefinancing of senior unsecured notes of $425.0 million in September 2019 and a lower interest rate environment that resulted in lower interest cost for our variable rate debt under our prior year amendment to our Seniorthe Note Securitization and Revolving Credit Agreement. These favorable terms were partially offset by higher outstanding debt as a result of the Mortara acquisition.Facilities. See Note 4 of our Consolidated Financial Statements5. Financing Agreements for additional information.
Loss on extinguishment of debt inwas $15.6 million and $3.3 million for the prior year relatesfiscal years ended September 30, 2020 and 2019 related to the amendmentrefinancing of oursenior unsecured notes of $425.0 million in September 2019 and the refinancing of the then-existing senior secured credit facilities maturing in 2021 (the ‘‘Prior Senior Secured Credit Agreement. Refer toFacilities’’) in August 2019. See Note 4 of our Consolidated Financial Statements5. Financing Agreements for additional information.
Investment income (expense) and other, net decreasedfor the fiscal year ended September 30, 2020 was expense of $6.9 million comprised primarily of the recognition of a non-cash pension plan settlement loss of $8.5 million and $2.0 million of losses related to our cost and equity method investments, which was partially offset by a $3.0 million gain that represented the step up to fair value of the historical investment of a company that was fully acquired during fiscal 2020. Investment income (expense) and other, net was expense of $14.6 million for the fiscal year ended September 30, 2019 comprised primarily of the loss recognized for the disposition of our surgical consumable products business in August 2019. See Note 2. Supplementary Financial Statement Information, Note 3. Business Combinations and Note 8. Retirement and Postretirement Benefit Plans for additional information.
Income Tax Expense
The effective tax rate was 17.8% for the fiscal year ended September 30, 2020 compared to 27.0% for the fiscal year ended September 30, 2019. The effective tax rate for fiscal 2020 was favorably impacted by the reduction of the contingent consideration accrual of $8.4 million, that is not subject to tax. The effective tax rate for fiscal 2019 was higher primarily due to the fiscal 2016 gainunfavorable impacts from the disposition of our products relateda subsidiary and unfavorable impacts from changes in uncertain tax positions. See Note 11. Income Taxes for additional information.
The adjusted effective tax rate remained relatively flat for the fiscal year ended September 30, 2020 compared to our perinatal data management system.the fiscal year ended September 30, 2019, decreasing just 0.3%, from 20.1% to 19.8%.
Earnings per Share
Diluted earnings per share increased from $2.25 to $3.32 for the fiscal year ended September 30, 2020 compared to the fiscal year ended September 30, 2019 primarily due to higher gross profits and lower tax rates, partially offset by the Loss on extinguishment of debt of $15.6 million and a pension plan settlement of $8.5 million. See Note 5. Financing Agreementsand Note 8. Retirement and Postretirement Benefit Plans for additional information.
Business Segment Divisional Income
| | | | | | | | | | | | | | | | | |
| (In millions) | Year Ended September 30 | | Change As
Reported |
| | 2020 | | 2019 | |
| Divisional income: | | | | | |
| Patient Support Systems | $ | 332.3 | | | $ | 299.9 | | | 10.8 | % |
| Front Line Care | 301.8 | | | 266.4 | | | 13.3 | % |
| Surgical Solutions | 39.5 | | | 61.2 | | | (35.5) | % |
Refer to Note 14. Segment Reporting for a description of how divisional income is determined.
Patient Support Systems divisional income increased 10.8% for the fiscal year ended September 30, 2020 compared to the fiscal year ended September 30, 2019 primarily due to global revenue growth, which was predominantly related to COVID-19 demand, which expanded gross profit due to improved efficiency in manufacturing and service activities, as well as increased rental durations.
Front Line Care divisional income increased 13.3% for the fiscal year ended September 30, 2020 compared to the fiscal year ended September 30, 2019 primarily due to global sales growth, predominantly driven by COVID-19 related demand for non-invasive ventilator sales under U.S. federal and state government contracts as well as patient monitoring and physical assessment tools, which produced higher gross profits, and improved efficiency in manufacturing.
Surgical Solutions divisional income decreased 35.5% for the fiscal year ended September 30, 2020 compared to the fiscal year ended September 30, 2019 predominantly due to the disposition of the surgical consumable products business in August 2019.
GAAP and Adjusted Earnings
Operating margin, income before income taxes, income tax expense and earnings attributable to common shareholders per diluted share are summarized in the table below.below for the fiscal years ended September 30, 2020 and 2019. GAAP amounts are adjusted for certain items to aid management in evaluating the performance of the business. Investors should consider these measures in addition to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Income tax expense is computed by applying a blended statutory tax rate based on the jurisdictional mix of the respective before tax adjustment.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, 2017 | | Year Ended September 30, 2016 |
| | Operating Margin1 | | Income
Before
Income
Taxes | | Income Tax
Expense | | Diluted EPS | | Operating
Margin | | Income
Before
Income
Taxes | | Income Tax
Expense | | Diluted EPS1 |
| GAAP Basis | 10.0 | % | | $ | 183.0 |
| | $ | 50.7 |
| | $ | 1.99 |
| | 8.7 | % | | $ | 138.3 |
| | $ | 15.5 |
| | $ | 1.86 |
|
| Adjustments: | | | | | | | | | | | | | | | |
| Acquisition and integration costs | 0.9 | % | | 23.5 |
| | 9.7 |
| | 0.21 |
| | 1.5 | % | | 38.9 |
| | 11.3 |
| | 0.41 |
|
| Acquisition-related intangible asset amortization | 4.0 | % | | 108.4 |
| | 34.2 |
| | 1.10 |
| | 3.6 | % | | 95.9 |
| | 31.7 |
| | 0.96 |
|
| Field corrective actions | — | % | | — |
| | (0.2 | ) | | — |
| | — | % | | 0.2 |
| | (0.1 | ) | | — |
|
Litigation settlements and expenses2 | (0.3 | )% | | (9.4 | ) | | (3.4 | ) | | (0.09 | ) | | — | % | | — |
| | — |
| | — |
|
| Special charges | 1.9 | % | | 52.5 |
| | 10.3 |
| | 0.63 |
| | 1.5 | % | | 39.9 |
| | 13.4 |
| | 0.40 |
|
| Foreign tax law change | — | % | | — |
| | (2.2 | ) | | 0.03 |
| | — | % | | — |
| | — |
| | — |
|
| Foreign valuation allowance | — | % | | — |
| | — |
| | — |
| | — | % | | — |
| | 19.5 |
| | (0.29 | ) |
| Debt refinancing | — | % | | — |
| | — |
| | — |
| | — | % | | 12.9 |
| | 4.7 |
| | 0.12 |
|
| Gain on disposition | — | % | | (1.0 | ) | | (0.4 | ) | | (0.01 | ) | | — | % | | (10.1 | ) | | (3.7 | ) | | (0.10 | ) |
| Adjusted Basis | 16.3 | % | | $ | 357.0 |
| | $ | 98.7 |
| | $ | 3.86 |
| | 15.3 | % | | $ | 316.0 |
| | $ | 92.3 |
| | $ | 3.38 |
|
1 Total may not add due to rounding |
2 Fiscal 2017 includes favorable litigation settlement of $15.1 million which was recognized as Special charges in our Statements of Consolidated Income. Refer to Note 8 of our Consolidated Financial Statements for additional information. |
The effective tax rate for the year to date period ended September 30, 2017 was 27.7% compared to 11.2% for the prior year. The effective tax rate for the current year is higher than the comparable period in fiscal 2016 due primarily to the difference in the amount of discrete tax benefits recognized in each period. The tax rate for fiscal 2017 was unfavorably impacted by the non-deductible impairment loss related to the sale of our Völker business compared to the large favorable period tax benefits of $20.0 million in the prior year primarily related to the release of the valuation allowance on our deferred tax assets in France. Fiscal 2017 also includes period tax benefits of $8.9 million related to the adoption of the ASU 2016-09, as discussed in Note 7 of our Consolidated Financial Statements.
The adjusted effective tax rate for the year ended September 30, 2017 was 27.6% compared to 29.2% for the comparable period in the prior year. The lower adjusted tax rate is due primarily to period tax items related to the adoption of ASU 2016-09.
Diluted earnings per share increased 7.0% on a reported basis and 14.2% on an adjusted basis for the year ended September 30, 2017.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended September 30 |
| (In millions) | 2020 | | 2019 |
| | Operating Margin | | Income
Before
Income
Taxes | | Income Tax
Expense | | Diluted EPS | | Operating
Margin | | Income
Before
Income
Taxes | | Income Tax
Expense | | Diluted EPS |
| GAAP Basis | 12.8 | % | | $ | 271.2 | | | $ | 48.2 | | | $ | 3.32 | | | 10.9 | % | | $ | 208.6 | | | $ | 56.4 | | | $ | 2.25 | |
| Adjustments: | | | | | | | | | | | | | | | |
Acquisition and integration costs and related fair value adjustments 1 | — | % | | (0.6) | | | 1.8 | | | (0.04) | | | 0.9 | % | | 28.1 | | | 5.3 | | | 0.34 | |
Acquisition-related intangible asset amortization 2 | 3.7 | % | | 109.0 | | | 26.1 | | | 1.23 | | | 4.2 | % | | 122.4 | | | 28.6 | | | 1.38 | |
| | | | | | | | | | | | | | | |
Field corrective actions 3 | 0.2 | % | | 4.9 | | | 1.2 | | | 0.05 | | | 0.2 | % | | 5.6 | | | 1.4 | | | 0.06 | |
Regulatory compliance costs 4 | 0.5 | % | | 15.6 | | | 3.7 | | | 0.18 | | | 0.5 | % | | 15.3 | | | 3.6 | | | 0.17 | |
Special charges 5 | 1.4 | % | | 41.5 | | | 9.2 | | | 0.48 | | | 1.0 | % | | 28.4 | | | 6.9 | | | 0.32 | |
Tax law and method changes 6 | — | % | | — | | | — | | | — | | | — | % | | — | | | (4.8) | | | 0.07 | |
Debt refinancing costs 7 | — | % | | 16.1 | | | 3.7 | | | 0.18 | | | — | % | | 4.0 | | | 0.9 | | | 0.05 | |
(Gain) loss on business combinations 8 | — | % | | (2.8) | | | (4.4) | | | 0.02 | | | — | % | | 15.9 | | | (12.4) | | | 0.42 | |
Pension settlement expense 9 | — | % | | 8.4 | | | 1.9 | | | 0.10 | | | — | % | | — | | | — | | | — | |
Litigation expenses and awards 10 | — | % | | (1.2) | | | (0.3) | | | (0.01) | | | 0.1 | % | | 2.0 | | | 0.5 | | | 0.02 | |
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| | | | | | | | | | | | | | | |
COVID-19 related cost and benefits, net 11 | 0.2 | % | | 1.4 | | | 0.7 | | | 0.02 | | | — | % | | — | | | — | | | — | |
| Adjusted Basis | 18.8 | % | | $ | 463.5 | | | $ | 91.8 | | | $ | 5.53 | | | 17.8 | % | | $ | 430.3 | | | $ | 86.4 | | | $ | 5.08 | |
1 Acquisition and integration costs and related fair value adjustments include legal and professional fees, temporary labor, consulting and other costs related to the closing and integration of acquired businesses, including purchase accounting adjustments for deferred revenue and other items, and contingent consideration. For fiscal 2020, a fair value adjustment of $4.6 million represents purchase accounting adjustments to reflect deferred revenue and to reduce contingent consideration liabilities associated with our business combinations. See Note 3. Business Combinations for further information. |
2 Acquisition-related intangible asset amortization relates to the amortization of intangible assets associated with our business combinations. See Note 3. Business Combinations and Note 4. Goodwill and Intangible Assets for further information. |
3 Field corrective action costs relate to costs incurred to address broad-based product performance matters outside of normal warranty provisions. These costs are included in Cost of goods sold. |
4 Regulatory compliance costs relate to updating existing product registrations to comply with the European Medical Device Regulations. These costs are included in Selling and administrative expenses. |
5 Special charges represent a variety of costs associated with restructuring actions, including severance and related benefits, lease termination fees, asset write-downs and temporary labor on shutdown of operations. It also includes costs related to a global information technology transformation, including rationalizing and transforming our enterprise resource planning software solutions and other complementary information technology systems. See Note 10. Special Charges for further information. |
6 Tax law and method changes relate to tax expenses and related unrecognized tax benefits due to the Tax Cuts and Jobs Act enacted in the United States in December 2017. See Note 11. Income Taxes for further information. |
7 Debt refinancing costs are expenses related to the costs incurred to refinance our previously outstanding debt obligations during fiscal 2020 and 2019. In addition, the costs include duplicative interest of $0.5 million and $0.7 million for fiscal 2020 and 2019 due the timing of our issuance and redemption of our Senior Notes. See Note 5. Financing Agreements for further information. |
8 (Gain) loss on business combinations relates to gains and losses recorded in Investment income (expense) and other, net resulting from business combinations during fiscal 2020 and 2019. See Note 3. Business Combinations for further information. |
9 Pension settlement expense represents an actuarial loss totaling $8.4 million recorded as a component of Investment income (expense) and other, net. See Note 8. Retirement and Postretirement Benefit Plans for additional information. |
10 Litigation expenses and awards are the aggregate charges, costs or recoveries associated with litigation settlements. These costs are recorded as a component of Investment income (expense) and other, net for fiscal 2020 and Selling and administrative expenses for fiscal 2019. |
11 COVID-19 related costs and benefits, net primarily represent incremental non-recurring special compensation costs paid to essential workers that continued to work in our production facilities and provide services to our customers, partially offset by funding received and costs abated under government programs created in response to COVID-19. See Note 1. Summary of Significant Accounting Policies for additional information. |
Fiscal Year Ended September 30, 20162019 Compared to the Fiscal Year Ended September30, 20152018
Net Revenue
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| (In millions) | | | | | | | | | U.S. | | OUS |
| Year Ended
September 30 | | Change As
Reported | | Constant
Currency | | Change As
Reported | | Change As
Reported | | Constant
Currency |
| 2019 | | 2018 | | | | | |
| Revenue: | | | | | | | | | | | | | |
| Product sales and service | $ | 2,615.0 | | | $ | 2,469.6 | | | 5.9 | % | | 7.3 | % | | 11.2 | % | | (4.4) | % | | (0.3) | % |
| Rental revenue | 292.3 | | | 378.4 | | | (22.8) | % | | (22.2) | % | | (24.5) | % | | (9.6) | % | | (5.0) | % |
| Total net revenue | $ | 2,907.3 | | | $ | 2,848.0 | | | 2.1 | % | | 3.4 | % | | 5.1 | % | | (4.6) | % | | (0.5) | % |
| | | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | | |
| Patient Support Systems | $ | 1,490.5 | | | $ | 1,429.5 | | | 4.3 | % | | 5.4 | % | | 7.6 | % | | (5.2) | % | | (0.8) | % |
| Front Line Care | 978.1 | | | 960.2 | | | 1.9 | % | | 2.9 | % | | 3.0 | % | | (0.9) | % | | 2.8 | % |
| Surgical Solutions | 438.7 | | | 458.3 | | | (4.3) | % | | (2.0) | % | | (0.1) | % | | (8.2) | % | | (3.8) | % |
| Total net revenue | $ | 2,907.3 | | | $ | 2,848.0 | | | 2.1 | % | | 3.4 | % | | 5.1 | % | | (4.6) | % | | (0.5) | % |
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| | | | | | | | | | U.S. | | OUS |
| | Year Ended September 30 | | Change As Reported | | Constant Currency | | Change As Reported | | Change As Reported | | Constant Currency |
| | 2016 | | 2015 | | | | | |
| Revenue: | | | | | | | | | | | | | |
| Product sales and service | $ | 2,263.4 |
| | $ | 1,604.5 |
| | 41.1 | % | | 43.1 | % | | 57.7 | % | | 17.5 | % | | 22.4 | % |
| Rental revenue | 391.8 |
| | 383.7 |
| | 2.1 | % | | 2.7 | % | | 4.2 | % | | (11.3 | )% | | (6.8 | )% |
| Total revenue | $ | 2,655.2 |
| | $ | 1,988.2 |
| | 33.5 | % | | 35.3 | % | | 43.7 | % | | 15.5 | % | | 20.3 | % |
| | | | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | | |
| Patient Support Systems | $ | 1,437.2 |
| | $ | 1,426.6 |
| | 0.7 | % | | 1.8 | % | | 8.2 | % | | (14.5 | )% | | (11.1 | )% |
| Front Line Care | 809.7 |
| | 139.0 |
| | N/M |
| | N/M |
| | N/M |
| | N/M |
| | N/M |
|
| Surgical Solutions | 408.3 |
| | 422.6 |
| | (3.4 | )% | | (1.4 | )% | | 5.2 | % | | (10.9 | )% | | (7.2 | )% |
| Total revenue | $ | 2,655.2 |
| | $ | 1,988.2 |
| | 33.5 | % | | 35.3 | % | | 43.7 | % | | 15.5 | % | | 20.3 | % |
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| OUS - Outside of the U.S. | | | | | | | | | | | | | |
| N/M - Not meaningful | | | | | | | | | | | | | |
Consolidated RevenueThe following table reflects sales growth data for the fiscal year ended September 30, 2019, excluding the impacts of the adoption of ASC 606, compared to the fiscal year ended September 30, 2018 to supplement our discussion and analysis of net revenue for revenue streams and reportable segments:
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| (In millions) | Year Ended September 30 | | Change | | Constant
Currency | | U.S. | | OUS |
| Adjusted 2019 | | 2018 | | | | Change | | Change | | Constant
Currency |
| Revenue: | | | | | | | | | | | | | |
| Product sales and service | $ | 2,502.8 | | | $ | 2,469.6 | | | 1.3 | % | | 2.7 | % | | 4.3 | % | | (4.4) | % | | (0.3) | % |
| Rental revenue | 389.3 | | | 378.4 | | | 2.9 | % | | 3.4 | % | | 4.5 | % | | (9.6) | % | | 5.0 | % |
| Total net revenue | $ | 2,892.1 | | | $ | 2,848.0 | | | 1.5 | % | | 2.8 | % | | 4.4 | % | | (4.7) | % | | (0.5) | % |
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| Revenue: | | | | | | | | | | | | | |
| Patient Support Systems | $ | 1,477.0 | | | $ | 1,429.5 | | | 3.3 | % | | 4.5 | % | | 6.4 | % | | (5.3) | % | | (0.9) | % |
| Front Line Care | 976.4 | | | 960.2 | | | 1.7 | % | | 2.7 | % | | 2.7 | % | | (0.9) | % | | 2.7 | % |
| Surgical Solutions | 438.7 | | | 458.3 | | | (4.3) | % | | (2.0) | % | | (0.1) | % | | (8.2) | % | | (3.8) | % |
| Total net revenue | $ | 2,892.1 | | | $ | 2,848.0 | | | 1.5 | % | | 2.8 | % | | 4.4 | % | | (4.7) | % | | (0.5) | % |
Impact of ASC 606
Product sales and service revenue increased 41.1%under ASC 606 by $112.2 million. This increase was primarily due to the accelerated recognition and reclassification from Rental revenue of $95.3 million for Front Line Care where it was determined for respiratory health products, there were no on-going performance obligations after delivery of the product to the customer, whereas previously this revenue was recognized over the period the Company was reimbursed by third parties. It also reflects an additional $13.5 million for Patient Support Systems due to the changes in the timing of revenue recognition based on when the performance obligation related to certain products was determined to be satisfied.
Rental revenue decreased under ASC 606 by $97.0 million. This decrease was primarily due to the reclassification to Product sales and service revenue of $95.3 million for Front Line Care as described above.
Business Segment Revenue
Excluding the impact of adopting ASC 606, revenue increased 1.5% on a reported basis, or 2.8% on a constant currency basis, for the fiscal year ended September 30, 2019 compared to the fiscal year ended September 30, 2018, primarily due to the following:
Patient Support Systems revenue increased 3.3% on a reported basis and 43.1%4.5% on a constant currency basis for the fiscal year ended September 30, 2019 compared to the fiscal year ended September 30, 2018. The increase was driven by strong growth in med-surg frames and care communications platform in the United States, as well as incremental revenue from recent acquisitions. Growth in the United States was partially offset by the divestiture of our third-party rental business in fiscal 2016 mainly due to the Welch Allyn acquisition. On a proforma basis, reflecting the inclusion2018 which contributed $12.2 million of Welch Allyn in both the fiscal 2016 and 2015 periods, product sales and service revenue increased 1.1% on a reported basis and increased 2.5% on a constant currency basis. These movements were driven by proforma growth of the Welch Allyn business and higher sales of specialty frames and surfaces and clinical workflow solutions in our Patient Support Systems segment. These increases were partially offset byrevenue during the fiscal year ended September 30, 2018 and lower international sales of specialty frames and surfaces and surgical products primarilyrevenue, specifically in the Middle East and Latin America as a result of macro-economic conditionsCanada related to large capital projects that occurred in these regions.fiscal 2018. Revenue for the periodfiscal year ended September 30, 2019 does not reflect approximately $5.3 million of revenue that was eliminated in Europe was also lower in fiscal 2016 comparedfair value purchase accounting adjustments to fiscal 2015.deferred revenue related to recent acquisitions.
RentalFront Line Care revenue increased 2.1%1.7% on a reported basis and 2.7% on a constant currency basis. This increase was mainly driven by higher volumes in our Patient Support Systems segment, partially offset by decreased international rental revenue resulting from volume declines and pricing pressures in Europe.
Business Segment Revenue
Patient Support Systems revenue increased 0.7% inbasis for the fiscal 2016year ended September 30, 2019 compared to the fiscal 2015. Product sales and service revenue increasedyear ended September 30, 2018 primarily due to higher sales of specialty frames and surfaces and clinical workflow solutions products,strong growth in our respiratory health from new product launches, partially offset primarily by declines in the Middle East, Europe, and Latin America. Rental revenue increased by 2.1% primarily due to increased volumes in the U.S., partially offset by lower volume and pricing pressures in Europe.our diagnostic tools for cardiology patients.
Front Line Care revenue increased in 2016 primarily as a result of the Welch Allyn acquisition. On a proforma constant currency basis, reflecting the inclusion of Welch Allyn in fiscal 2016 and 2015, Front Line Care revenue grew 6.0% due mainly to growth in Welch Allyn. Fiscal year 2015 results for this segment primarily reflects our respiratory care business, which achieved low single digit revenue growth in fiscal 2016.
Surgical Solutions revenue decreased 3.4%4.3% on a reported basis and 1.4%2.0% on a constant currency basis. On a constant currency basis sales declines were mainlyfor the fiscal year ended September 30, 2019 compared to the fiscal year ended September 30, 2018, primarily due to the sale of the surgical consumable products business in August 2019 and lower revenue in our international original equipment manufacturer (“OEM”) product lines and due to larger projects in fiscal 2018 in the Middle East, and Latin America as a result of macro-economic difficulties in these regions. These declines were partially offset by increasessales growth in our Allen Medical and Trumpf businessesintegrated operating tables in the U.S.United States.
Gross Profit
| | | | | | | | | | | | | |
| (In millions) | Year Ended September 30 |
| 2019 | | 2018 | | |
Gross Profit 1 | | | | | |
| Product sales and service | $ | 1,284.3 | | | $ | 1,195.5 | | | |
| Percent of Related Net Revenue | 49.1 | % | | 48.4 | % | | |
| | | | | |
| Rental | 140.7 | | | 198.7 | | | |
| Percent of Related Net Revenue | 48.1 | % | | 52.5 | % | | |
| | | | | |
| Total Gross Profit | $ | 1,425.0 | | | $ | 1,394.2 | | | |
| Percent of Total Net Revenue | 49.0 | % | | 49.0 | % | | |
1 Gross Profit is calculated as net product sales and service revenue and rental revenue less the related cost of goods sold or rental expenses as disclosed on the face of the Statements of Consolidated Income. | | |
|
| | | | | | | |
| | Year Ended September 30 |
| | 2016 | | 2015 |
| Gross Profit | | | |
| Product sales and service | $ | 1,054.0 |
| | $ | 683.3 |
|
| Percent of Related Revenue | 46.6 | % | | 42.6 | % |
| | | | |
| Rental | $ | 203.0 |
| | $ | 197.0 |
|
| Percent of Related Revenue | 51.8 | % | | 51.3 | % |
| | | | |
| Total Gross Profit | $ | 1,257.0 |
| | $ | 880.3 |
|
| Percent of Related Revenue | 47.3 | % | | 44.3 | % |
Product sales and service gross marginprofit increased 400 basis points inby $88.8 million or 7.4% for the fiscal 2016. The increase in gross margin was driven primarily byyear ended September 30, 2019 compared to the addition of Welch Allyn’s higher gross margins. Excluding the impactfiscal year ended September 30, 2018. Over half of the Welch Allyn acquisition, organic gross margin improved 180 basis pointsincrease was the result of the adoption of ASC 606, which includes the reclassification of revenues and costs from Rental to Product sales and service for respiratory health and recognition timing changes for the care communication platform sales. The remaining increase is due to new product growth in fiscal 2016 driven by favorable product mix in ourrespiratory health and Patient Support Systems, segment, as well as manufacturingincluding recent acquisitions, and operational efficiencies, and favorable geographic mix. These increases were partially offset by gross margin declinesvoluntary field corrective action costs and the disposition of our surgical consumable products business in our international regions.August 2019.
Rental gross margin increased 50 basis pointsprofit decreased by $58.0 million or 29.2% for the fiscal year ended September 30, 2019 compared to the fiscal year ended September 30, 2018. A majority of the decrease was the result of the adoption of ASC 606, which includes reclassification of the respiratory health products as described above. The remaining decrease is primarily related to the disposition of our third-party rental business in fiscal 2016. Gross margin was favorably impacted by product mix and increased leverage2018.
Operating Expenses
| | | | | | | | | | | | | |
| (In millions) | Year Ended September 30 |
| 2019 | | 2018 | | |
| Research and development expenses | $ | 139.5 | | | $ | 135.6 | | | |
| Percent of Total Net Revenue | 4.8 | % | | 4.8 | % | | |
| | | | | |
| Selling and administrative expenses | $ | 818.6 | | | $ | 784.7 | | | |
| Percent of Total Net Revenue | 28.2 | % | | 27.6 | % | | |
| | | | | |
| Acquisition-related intangible asset amortization | $ | 122.4 | | | $ | 106.9 | | | |
| Percent of Total Net Revenue | 4.2 | % | | 3.8 | % | | |
|
| | | | | | | |
| | Year Ended September 30 |
| | 2016 | | 2015 |
| Research and development expenses | $ | 133.5 |
| | $ | 91.8 |
|
| Percent of Total Revenue | 5.0 | % | | 4.6 | % |
| | | | |
| Selling and administrative expenses | $ | 853.3 |
| | $ | 664.2 |
|
| Percent of Total Revenue | 32.1 | % | | 33.4 | % |
Research and development expenses increased 45.4% primarilyfor the fiscal year ended September 30, 2019 compared to the fiscal year ended September 30, 2018 due to the addition of Welch Allyn and additionalcontinued investment in new productproducts. As a percentage of revenue, Research and development initiatives in Surgical Solutions and in our respiratory care business.expenses remained consistent.
Selling and administrative expenses as a percent of total revenue decreased 130 basis points. Selling and administrative expenses includeincreased $33.9 million, or 4.3%, for the fiscal year ended September 30, 2019 compared to the fiscal year ended September 30, 2018 primarily due to higher acquisition and integration costs acquisition-relatedand regulatory compliance costs during fiscal 2019, partially offset by higher litigation settlement expenses during fiscal 2018.
Acquisition-related intangible asset amortization FDA remediation expenses,increased by $15.5 million, or 14.5%, for the fiscal year ended September 30, 2019 compared to the fiscal year ended September 30, 2018 primarily due to recent acquisitions during fiscal 2019, offset slightly by the disposition of the surgical consumable products business in August 2019.
Special Charges and Other
| | | | | | | | | | | | | | | | |
| (In millions) | | Year Ended September 30 | | |
| | 2019 | | 2018 | | |
| Special charges | | $ | 28.4 | | | $ | 77.6 | | | |
| | | | | | |
| Interest expense | | $ | (89.6) | | | $ | (95.0) | | | |
| Loss extinguishment of debt | | (3.3) | | | — | | | |
| Investment income (expense) and other, net | | (14.6) | | | 2.8 | | | |
In connection with various organizational changes to improve our business alignment and cost structure, we recognized Special charges of $28.4 million and $77.6 million for the fiscal year ended September 30, 2019 compared to the fiscal year ended September 30, 2018. These charges relate to the initiatives described in Note 10. Special Charges.
Interest expense was lower for the fiscal year ended September 30, 2019 compared to the fiscal year ended September 30, 2018 mainly due to a supplemental stock compensation charge,decrease in long-term debt outstanding and litigation settlementsthe impact of our cross-currency swaps entered into in July 2018. See Note 6. Derivative Instruments and expenses that totaled $114.8 millionHedging Activity for additional information.
Loss extinguishment of debt relates to refinancing of the then-existing senior secured credit facilities maturing in 2016, compared with $90.0 million2021 (the “Prior Senior Secured Credit Facilities”) in 2015. Excluding these items, sellingAugust 2019. See Note 5. Financing Agreements for additional information.
Investment income (expense) and administrative expenses decreased 110 basis points as a percentageother, net for the fiscal year ended September 30, 2019 primarily included the loss recorded related to the disposition of revenue.our surgical consumable products business in August 2019. See Note 3. Business Combinations for additional information.
Income Tax Expense
The effective tax rate was 27.0% for the fiscal year ended September 30, 2019 compared to (28.0)% for the fiscal year ended September 30, 2018. The increase was primarily due to tax benefits recorded in 2018 related to the Tax Act. See Note 11. Income Taxes for additional information.
The adjusted effective tax rate for the fiscal year ended September 30, 2019 was 20.1% compared to 19.5% for the fiscal year ended September 30, 2018. The higher adjusted tax rate in fiscal 2019 is primarily due to less excess tax benefits on deductible stock compensation and the 2018 impacts of the Tax Act, including unfavorable impacts of global intangible low-taxed income (“GILTI”), offset by favorable impacts of foreign-derived intangible income (“FDII”) and a reduction in the U.S. federal corporate tax rate.
Earnings per Share
Diluted earnings per share decreased from $3.73 for the fiscal year ended September 30, 2018 to $2.25 for the fiscal year ended September 30, 2019 primarily due to the one-time tax benefit recorded in fiscal 2018 related to the Tax Act, the loss on the disposition of our surgical consumable products business, and the related tax expense incurred from organizational changes executed to facilitate the disposition.
Business Segment Divisional Income
| | | | Year Ended September 30 | | Change As Reported | |
| (In millions) | | (In millions) | Year Ended September 30 | | Change As
Reported |
| | 2016 | | 2015 | | Change As Reported | | 2019 | | 2018 | |
| Divisional income: | |
| | |
| | Divisional income: | | | | | |
| Patient Support Systems | $ | 245.2 |
| | $ | 206.5 |
| | 18.7 | % | Patient Support Systems | $ | 299.9 | | | $ | 285.0 | | | 5.2 | % |
| Front Line Care | 202.1 |
| | 41.5 |
| | N/M |
| Front Line Care | 266.4 | | | 253.0 | | | 5.3 | % |
| Surgical Solutions | 46.2 |
| | 56.0 |
| | (17.5 | )% | Surgical Solutions | 61.2 | | | 53.1 | | | 15.3 | % |
| | | | | | | |
| N/M - Not meaningful | | | | | | |
|
Refer to Note 11 of our Consolidated Financial Statements14. Segment Reporting for a description of how divisional income is determined.
Patient Support Systems divisional income increased 18.7% due primarily5.2% for the fiscal year ended September 30, 2019 compared to improved gross margins, along with improved operating leverage as operating expenses were lower. Product sales and service margins increased compared with 2015,the fiscal year ended September 30, 2018 primarily due to favorable product mixrevenue growth in the United States, and manufacturing efficiencies, partially offset by reduced leverage of manufacturing costs in our international regions. Rental margins also increased during the yearlower operating expenses as a resultpercentage of product mix and increased leverage of our fleet and field service infrastructure due to higher rental revenue, partially offset by pricing pressures in our international regions.revenue.
Front Line Care divisional income increased in 2016 primarily5.3% for the fiscal year ended September 30, 2019 compared to the fiscal year ended September 30, 2018 as a result of the Welch Allyn acquisition. revenue growth and higher margins from new products.
Surgical Solutions divisional income decreased 17.5%. Divisional income was impacted by higher investments in research and development and sales and marketing in support of long-term growth initiatives.
Special Charges and Other
|
| | | | | | | | |
| | | Year Ended September 30 |
| | | 2016 | | 2015 |
| Special charges | | $ | 39.9 |
| | $ | 41.2 |
|
| | | | | |
| Interest expense | | $ | (90.4 | ) | | $ | (18.4 | ) |
| Loss on extinguishment of debt | | $ | (10.8 | ) | | $ | — |
|
| Investment income and other, net | | $ | 9.2 |
| | $ | 0.4 |
|
We recognized special charges of $39.9 million inincreased 15.3% for the fiscal 2016 and $41.2 million in fiscal 2015, related to various organizational changes that we implemented to improve our business alignment and cost structure. These charges relate to the initiatives described in Note 8 of our Consolidated Financial Statements.
Interest expense was higheryear ended September 30, 2019 compared with 2015 due to additional borrowings made in connection with the Welch Allyn acquisition.
Loss on extinguishment of debt represents the write-off of deferred financing fees in connection with the refinancing of our outstanding debt in the fourth quarter of fiscal 2016. Refer to Note 4 of our Consolidated Financial Statements for additional information regarding our debt refinancing.
Investment income and other, net increased due to the fiscal 2016 gainyear ended September 30, 2018 as a result of revenue growth from the dispositionoperating tables, and lower operating expenses as a percentage of our perinatal data management system in the fourth quarter of 2016.revenue.
GAAP and Adjusted Earnings
Operating margin, income before income taxes, income tax expense, and earnings attributable to common shareholders per diluted share are summarized in the table below.below for the fiscal years ended September 30, 2019 and 2018. GAAP amounts are adjusted for certain items to aid management in evaluating the performance of the business. Investors should consider these measures in addition to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Income tax expense is computed by applying a blended statutory tax rate based on the jurisdictional mix of the respective before tax adjustment.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Year Ended September 30 |
| | 2019 | | 2018 |
| Operating
Margin | | Income
Before
Income
Taxes | | Income
Tax
Expense | | Diluted
EPS | | Operating
Margin | | Income
Before
Income
Taxes | | Income
Tax
Expense | | Diluted
EPS |
| GAAP Basis | 10.9 | % | | $ | 208.6 | | | $ | 56.4 | | | $ | 2.25 | | | 10.2 | % | | $ | 197.2 | | | $ | (55.2) | | | $ | 3.73 | |
| Adjustments: | | | | | | | | | | | | | | | |
Acquisition and integration costs and related fair value adjustments 1 | 0.9 | % | | 28.1 | | | 5.3 | | | 0.34 | | | 0.3 | % | | 8.1 | | | 2.2 | | | 0.09 | |
Acquisition-related intangible asset amortization 2 | 4.2 | % | | 122.4 | | | 28.6 | | | 1.38 | | | 3.8 | % | | 106.9 | | | 28.2 | | | 1.16 | |
Field corrective actions 3 | 0.2 | % | | 5.6 | | | 1.4 | | | 0.06 | | | — | % | | — | | | — | | | — | |
Regulatory compliance costs 4 | 0.5 | % | | 15.3 | | | 3.6 | | | 0.17 | | | 0.1 | % | | 4.5 | | | 1.2 | | | 0.04 | |
Litigation expenses and awards 5 | 0.1 | % | | 2.0 | | | 0.5 | | | 0.02 | | | 0.2 | % | | 5.8 | | | 1.5 | | | 0.06 | |
Special charges 6 | 1.0 | % | | 28.4 | | | 6.9 | | | 0.32 | | | 2.7 | % | | 77.6 | | | 21.1 | | | 0.84 | |
Tax law and method changes 7 | — | % | | — | | | (4.8) | | | 0.07 | | | — | % | | 0.1 | | | 78.8 | | | (1.16) | |
Debt refinancing costs 8 | — | % | | 4.0 | | | 0.9 | | | 0.05 | | | — | % | | — | | | — | | | — | |
(Gain) loss on business combinations 9 | — | % | | 15.9 | | | (12.4) | | | 0.42 | | | — | % | | (1.0) | | | — | | | (0.01) | |
| Adjusted Basis | 17.8 | % | | $ | 430.3 | | | $ | 86.4 | | | $ | 5.08 | | | 17.3 | % | | $ | 399.2 | | | $ | 77.8 | | | $ | 4.75 | |
1 Acquisition and integration costs and related fair value adjustments include legal and professional fees, temporary labor, consulting and other costs related to the closing and integration of acquired businesses, including purchase accounting adjustments for deferred revenue and other items, and contingent consideration. For the fiscal year ended September 30, 2019, related fair value adjustments of $8.5 million represent purchase accounting adjustments to reflect deferred revenue and to increase contingent consideration associated with our business combinations. See Note 3. Business Combinations for further information. |
2 Acquisition-related intangible asset amortization relates to the amortization of intangible assets associated with our business combinations. See Note 3. Business Combinations and Note 4. Goodwill and Intangible Assets for further information. |
3 Field corrective action costs relate to costs incurred to address broad-based product performance matters outside of normal warranty provisions. These costs are included in Cost of goods sold. |
4 Regulatory compliance costs relate to updating existing product registrations to comply with the European Medical Device Regulations. These costs are included in Selling and administrative expenses. |
5 Litigation expenses and awards are the aggregate charges, costs or recoveries associated with litigation settlements. These costs are included in Selling and administrative expenses. |
6 Special charges represent a variety of costs associated with restructuring actions, including severance and related benefits, lease termination fees, asset write-downs and temporary labor on shutdown of operations. It also includes costs related to a global information technology transformation, including rationalizing and transforming our enterprise resource planning software solutions and other complementary information technology systems. See Note 10. Special Charges for further information. |
7 Tax law and method changes relate to tax expenses and related unrecognized tax benefits due to the Tax Cuts and Jobs Act enacted in the United States in December 2017. See Note 11. Income Taxes for further information. |
8 Debt refinancing costs are expenses related to the costs incurred to refinance our previously outstanding debt obligations during fiscal 2019. See Note 5. Financing Agreements for further information. |
9 (Gain) loss on business combinations relates to gains and losses recorded in Investment income (expense) and other, net resulting from business combinations during fiscal 2019 and 2018. See Note 3. Business Combinations for further information. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30 |
| | 2016 | | 2015 |
| | Operating Margin | | Income Before Income Taxes | | Income Tax Expense | | Diluted EPS 1 | | Operating Margin 1 | | Income Before Income Taxes | | Income Tax Expense | | Diluted EPS |
| GAAP Basis | 8.7 | % | | $ | 138.3 |
| | $ | 15.5 |
| | $ | 1.86 |
| | 4.2 | % | | $ | 65.1 |
| | $ | 18.3 |
| | $ | 0.82 |
|
| Adjustments: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Acquisition and integration costs | 1.5 | % | | 38.9 |
| | 11.3 |
| | 0.41 |
| | 3.2 | % | | 62.8 |
| | 18.0 |
| | 0.76 |
|
| Acquisition-related intangible asset amortization | 3.6 | % | | 95.9 |
| | 31.7 |
| | 0.96 |
| | 1.7 | % | | 34.1 |
| | 9.8 |
| | 0.42 |
|
| FDA remediation expenses | — |
| | — |
| | — |
| | — |
| | 0.2 | % | | 3.8 |
| | 1.2 |
| | 0.04 |
|
| Field corrective actions | — |
| | 0.2 |
| | (0.1 | ) | | — |
| | 0.2 | % | | 4.5 |
| | 1.4 |
| | 0.05 |
|
| Litigation settlements and expenses | — |
| | — |
| | — |
| | — |
| | — |
| | (0.6 | ) | | (0.2 | ) | | (0.01 | ) |
| Special charges | 1.5 | % | | 39.9 |
| | 13.4 |
| | 0.40 |
| | 2.1 | % | | 41.2 |
| | 10.7 |
| | 0.52 |
|
| Supplemental stock compensation charge | — |
| | — |
| | — |
| | — |
| | 0.3 | % | | 6.1 |
| | 2.2 |
| | 0.07 |
|
| Foreign valuation allowance | — |
| | — |
| | 19.5 |
| | (0.29 | ) | | — |
| | — |
| | 1.9 |
| | (0.03 | ) |
| Debt refinancing | — |
| | 12.9 |
| | 4.7 |
| | 0.12 |
| | — |
| | — |
| | — |
| | — |
|
| Gain on disposition | — |
| | (10.1 | ) | | (3.7 | ) | | (0.10 | ) | | — |
| | — |
| | — |
| | — |
|
| Adjusted Basis | 15.3 | % |
| $ | 316.0 |
|
| $ | 92.3 |
|
| $ | 3.38 |
|
| 11.8 | % |
| $ | 217.0 |
|
| $ | 63.3 |
|
| $ | 2.64 |
|
1 Total does not add due to rounding |
The adjusted effective tax rate was 29.2% for both fiscal years 2016 and 2015.
Liquidity and Capital Resources
| | | | | | | | | | | | | | | | | |
| | Year Ended September 30 |
| (In millions) | 2020 | | 2019 | | 2018 |
| Cash Flows Provided By (Used In): | | | | | |
| Operating activities | $ | 481.7 | | | $ | 401.4 | | | $ | 395.2 | |
| Investing activities | (131.2) | | | (249.0) | | | (82.4) | |
| Financing activities | (695.0) | | | 304.7 | | | (356.6) | |
| Effect of exchange rate changes on cash | 7.2 | | | (6.3) | | | (5.0) | |
| (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash | $ | (337.3) | | | $ | 450.8 | | | $ | (48.8) | |
|
| | | | | | | | | | | |
| | Year Ended September 30 |
| (Dollars in millions) | 2017 | | 2016 | | 2015 |
| Cash Flows Provided By (Used In): | | | | | |
| Operating activities | $ | 311.1 |
| | $ | 281.2 |
| | $ | 213.8 |
|
| Investing activities | (389.4 | ) | | (97.7 | ) | | (1,756.4 | ) |
| Financing activities | 70.6 |
| | (141.9 | ) | | 1,642.7 |
|
| Effect of exchange rate changes on cash | 7.3 |
| | (2.2 | ) | | (6.6 | ) |
| Increase (Decrease) in Cash and Cash Equivalents | $ | (0.4 | ) | | $ | 39.4 |
| | $ | 93.5 |
|
Net cash flows from operating activities and selected borrowings represented our primary sources of funds for growth of the business, including capital expenditures and acquisitions. Our financing agreements contain certain restrictions relating to dividend payments, the making of restricted payments and the incurrence of additional secured and unsecured indebtedness. None of our financing agreements contain any credit rating triggers whichthat would increase or decrease our cost of borrowings. CreditChanges in our credit rating changes can, however, impact the cost of borrowings and any potential future borrowings under any new financing agreements.
Operating Activities
Cash provided by operating activities increased $29.9$80.3 million infor the fiscal 2017year ended September 30, 2020 compared to the priorfiscal year ended September 30, 2019 primarily due primarily to higher net income and a prior year pension contributionhigher collections of accounts receivable, partially offset by working capital activities. Cash provided by operating activities was driven primarily by net income, adjusted for the non-cash effectshigher inventory levels in anticipation of depreciation, amortization, the impairment of our Völker business and stock compensation expense, along with working capital activities.increased customer demand related to COVID-19.
Cash provided by operating activities during fiscal 2016 was driven primarily by net income, adjustedincreased $6.2 million for the non-cash effectsfiscal year ended September 30, 2019 compared to the fiscal year ended September 30, 2018 primarily due to higher operating profit and working capital improvements.
Investing Activities
Cash used in investing activities decreased $117.8 million for the fiscal year ended September 30, 2020 compared to the fiscal year ended September 30, 2019 primarily due to the decrease in cash paid for acquisitions of depreciation, amortization, loss on extinguishment of debt, stock compensation expense$275.0 million. Refer to the table below and the rollout of inventory step-up from the Welch Allyn acquisition. These sources of cash wereNote 3. Business Combinations. The decrease is partially offset by the payoutnet proceeds of performance-based compensation related to our 2015 fiscal year, a pension contribution of $30$166.6 million acquisition and restructuring costs related mainly to Welch Allyn and other working capital activities. Cash provided by operating activities increased compared toreceived from the prior year due mainly to higher net income adjusted for the non-cash effectsdisposition of the items previously listed.surgical consumable products business in August 2019.
Cash provided by operating activities during fiscal 2015 was driven by net income, adjusted up for non-cash expenses including depreciation, amortization, stock compensation, and a pension settlement charge, offset by the provision for deferred income taxes and changes in working capital.
Investing Activities
Cash used in investing activities increased $291.7$166.6 million infor the fiscal 2017year ended September 30, 2019 compared to the priorfiscal year ended September 30, 2018 primarily due to ourcash paid for recent acquisitions during fiscal 2019, the acquisition of Mortaranon-marketable equity securities of $26.6 million as described in Note 2. Supplementary Financial Statement Information, as well as the second quarteracquisition of fiscal 2017, partiallythe right to use patented technology and certain related assets from a supplier in our Front Line Care segment of $17.1 million, as described in Note 3. Business Combinations. These uses of cash were offset by net proceeds onof $166.6 million from the sale of property, plant and equipment and our recently divested Architectural Products and Völker businesses. See Note 2certain of our Consolidated Financial Statements for additional information on our acquisitionsurgical consumable products and related assets, as described in Note 3. Business Combinations.
| | | | | | | | | | | | | | |
| Company Name | | Date of Acquisition | | Cash Paid |
| Excel Medical | | January 10, 2020 | | $ | 13.1 | |
| Connecta | | May 18, 2020 | | 7.5 |
| Videomed | | July 21, 2020 | | 7.8 |
| Fiscal 2020 Totals | | | | $ | 28.4 | |
| | | | |
| Voalte | | April 1, 2019 | | $ | 175.8 | |
| Breathe | | September 3, 2019 | | 127.6 |
| Fiscal 2019 Totals | | | | $ | 303.4 | |
Cash used for investing activities during fiscal 2016 consisted mainly of capital expenditures and payment for the acquisition of Anodyne Medical Device, Inc., known as Tridien Medical ("Tridien"). The fiscal 2015 cash used for investing activities was higher due to the acquisition of Welch Allyn and higher than normal capital expenditures due to investments in our rental fleet to support volume increases.
Financing Activities
Cash used in financing activities was $695.0 million for the fiscal year ended September 30, 2020 primarily driven by the repayment of the senior unsecured 5.75% notes of $425.0 million and related prepayment penalty of $12.2 million on October 7, 2019 with the net proceeds of the senior unsecured 4.375% notes issued in September 2019, as well as repayments of $270.0 million related to the Revolving Credit Facility during fiscal 2020. Refer to Note 5. Financing Agreements for additional detail regarding the fiscal 2019 refinancing and our existing financing agreements.
Cash provided by financing activities increased $212.5was $304.7 million for the fiscal year ended September 30, 2019, primarily driven by the refinancing activities described in Note 5. Financing Agreements, including $419.7 million of net proceeds from the issuance of senior unsecured notes and additional other borrowings, offset by repurchases of our common stock of $117.2 million executed under the ongoing program described in Note 13. Common Stock, and dividend payments of $55.4 million.
Our debt-to-capital ratio was 52.1%, 60.8% and 55.0% as of September 30, 2020, 2019 and 2018.
Other Liquidity Matters
Our cash balances and cash flows generated from operations may be used to fund strategic investments, business acquisitions, working capital needs, investments in technology and marketing, share repurchases and payments of dividends to our shareholders. We believe that our cash balances and cash flows generated from operations, along with amounts available under our financing agreements, will be sufficient to fund operations, working capital needs, capital expenditure requirements and financing obligations for at least the next 12 months from the date of this filing.
Our cash flows from operating activities for the fiscal 2017 primarily dueyear ended September 30, 2020 were not materially adversely impacted by COVID-19. There have been no changes to increases in our net borrowings in connectioncost of or access to our capital and funding sources. We have not identified instability with the Mortara acquisition, offset by $50.0financial institutions with whom we maintain our financing relationships. We believe we can continue to service our outstanding borrowings or other financial obligations.
As of September 30, 2020, there were no outstanding borrowings on the Revolving Credit Facility and available borrowing capacity was $1,191.0 million after giving effect to the $9.0 million of share repurchases.outstanding standby letters of credit. As of September 30, 2019, there were $80.0 million outstanding borrowings on the Revolving Credit Facility, and available borrowing capacity was $1,112.8 million after giving effect to $7.2 million of outstanding standby letters of credit.
Our long-term debt instruments require nominal repayments over the next 12 months, with our next significant maturity occurring in August 2024. Since the beginning of the global COVID-19 pandemic in December 2019, we have not experienced liquidity constraints through either the movement of cash or under our Revolving Credit Facility. Furthermore, we have successfully extended our 364-day accounts receivable securitization facilities as of April 27, 2020. As of September 30, 2020, we were in compliance with all debt covenants under our financing agreements. See Note 4 of our Consolidated Financial Statements5. Financing Agreements for additional information on our financing agreements. During the year ended September 30, 2017, we increased our dividends paid by $0.04 per share comparedagreements and outstanding debt obligations.
We do not anticipate incurring significant incremental capital expenditures due to the prior year.pandemic. We will continue to evaluate the allocation of our capital spending and may delay discretionary capital spending or redirect capital spending to support the increased demand for certain products used to treat patients diagnosed with COVID-19.
Cash used in financing activities during fiscal 2016 consisted mainly of the pay down of long-term debt and payments of cash dividends. During the year ended September 30, 2016, we increased our dividends paid by $0.0375 per share comparedRefer to the prior year. The net cash used in financing activitiessection titled “The Impacts of COVID-19 on Hillrom” within Management’s Discussion & Analysis of Financial Condition and Results of Operations for fiscal 2016 compares to net cash provided by financing activities in fiscal 2015, as borrowings for the acquisition of Welch Allyn exceeded stock repurchases and the payment of dividends in the prior year period.further information.
Cash provided by financing activities during fiscal 2015 consisted mainly of new borrowings which were used to fund the Welch Allyn acquisition. Borrowings under our prior credit facility were also used to fund the higher rental fleet investment previously discussed. This was offset by treasury stock acquired, dividend payments, and payments to retire previously outstanding debt as this was replaced with the financing obtained in conjunction with the Welch Allyn acquisition. During the year ended September 30, 2015, we increased our dividends paid by $0.0375 per share compared to the prior year.
The treasury stock acquired refers to purchases in the open market and the repurchases of shares associated with employee payroll tax withholdings for restricted and deferred stock distributions.
Our debt-to-capital ratio was 62.8%, 63.5% and 65.9% at September 30, 2017, 2016 and 2015, respectively.
Other Liquidity Matters
In addition to the discussion of our financing agreements detailed in Note 4 of our Consolidated Financial Statements and our retirement and postretirement benefit plans detailed in Note 6 of our Consolidated Financial Statements, we intend to continue to pay quarterly cash dividends comparable to those paid in the periods covered by these financial statements. However, the declaration and payment of dividends by us will be subject to the sole discretion of our Board and will depend upon many factors, including our financial condition, earnings, capital requirements, covenants associated with debt obligations, legal requirements and other factors deemed relevant by our Board.
During fiscal 2017 and fiscal 2015, we purchased 0.8 million shares and 1.2 million shares of our common stock valued at $50.0 million and $54.8 million in the open market, leaving $14.7 million available for purchase as of September 30, 2017 under a $190.0 million share repurchase program approved by the Board of Directors in September 2013. Repurchases may be made on the open market or via private transactions and are used for general business purposes. On November 6, 2017, the Board of Directors approved an increase to the share repurchase program in an amount of $150.0 million, leaving the company approximately $165.0 million of availability under the share repurchase program as of such date. This program does not have an expiration date and there are no plans to terminate this program in the future.
Over the long term, we intend to continue to pursue inorganic growth in certain areas of our business, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be predicted. Refer to Note 3. Business Combinations for additional detail regarding the acquisitions completed during fiscal 2020 and 2019.
In September 2019, the Board approved an additional $170.0 million for share repurchases. Refer to Item 5 of Part I of this Form 10-K for additional information.
Our primary pension plan invests in a variety of equity and debt securities. Refer to Note 8. Retirement and Postretirement Benefit Plans for additional detail regarding our retirement plans, including our benefit obligations, plan assets funded status and estimated future benefit payments, among others.
We intend to continue to pay quarterly cash dividends comparable to those paid in the periods covered by these financial statements. However, the declaration and payment of dividends will be subject to the sole discretion of our Board and will depend upon many factors, including our financial condition, earnings, capital requirements, covenants associated with debt obligations, legal requirements and other factors considered relevant by our Board.
On September 15, 2020, we committed to a workforce reduction plan, which includes a voluntary retirement program and involuntary severance actions. The actions under this plan will result in cash expenditures of approximately $35.0 million and will be substantially complete in fiscal 2021.
In fiscal 2019, we repatriated $10.2 million of our cash and cash equivalents from outside the United States that was previously taxed and paid no related foreign withholding tax. In fiscal 2020, we repatriated $12.2 million of our cash and cash equivalents from outside the United States that was previously taxed, and paid no related foreign withholding tax. These repatriated funds were used for working capital purposes or debt repayments. As of September 30, 2020, approximately 54.0% of our cash and cash equivalents, excluding restricted cash, were held by our foreign subsidiaries.
With regard to our non-U.S. subsidiaries, it is our practice and intention to reinvest the earnings in those businesses to fund capital expenditures and other operating cash needs. Because the undistributed earnings of non-U.S. subsidiaries are considered to be permanently reinvested, no U.S. deferred income taxes or foreign withholding taxes have been provided on earnings subsequent to the enactment of the Tax Act. Future repatriations of cash and cash equivalents, if any, held by our foreign subsidiaries will generally not be subject to U.S. federal tax if earned prior to the enactment of the Tax Act. We believe that cash on hand and cash generated from U.S. operations, along with amounts available under our financing agreements, will be sufficient to fund operations, working capital needs, capital expenditure requirements, and financing obligations for at least the next twelve months from the date of this filing. However, disruption and volatility in the credit markets could impede our access to capital. Our $700.0 million revolving credit facility is with a syndicate of banks, which we believe reduces our exposure to any one institution and would still leave us with significant borrowing capacity in the event that any one of the institutions within the group is unable to comply with the terms of our agreement.
As of September 30, 2017, approximately 80.3% of our cash and cash equivalents were held by our foreign subsidiaries. Portions of this may be subject to U.S. income taxation if repatriated to the U.S., however, because cash and cash equivalents held by our foreign subsidiaries are largely used for operating needs outside the U.S. we have no need to repatriate this cash for other uses. We believe that cash on hand and cash generated from operations, along with amounts available under our Revolving Credit Facility and Securitization Program, will be sufficient to fund operations, working capital needs, capital expenditure requirements and financing obligations.
The U.S. Internal Revenue Service and Treasury Department continue to release proposed guidance with respect to the Tax Act. We continue to evaluate what impact, if any, each piece of guidance may have on our related tax positions and our effective tax rate if, and when, such guidance is finalized.
Credit Ratings
In fiscal 2017,2020, Standard and Poor’s Rating Services and Moody’s Investor Service issued credit ratings for Hill-RomHillrom of BB+ and Ba2, respectively, with stable outlooks.
Other Uses of Cash
We expect capital spending in 2018fiscal 2021 to be approximately $110.0$100.0 million. Capital spending will be monitored and controlled as the year progresses.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements.
Contractual Obligations, Contingent Liabilities and Commitments
To give a clear picture of matters potentially impacting our liquidity position, the following table outlines our contractual obligations as of September 30, 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (In millions) | Total | | Less Than
1 Year | | 1 - 3
Years | | 3 - 5
Years | | More Than
5 Years |
| Contractual Obligations | | | | | | | | | |
| Long-term debt obligations | $ | 1,890.6 | | | $ | 222.5 | | | $ | 125.0 | | | $ | 1,088.4 | | | $ | 454.7 | |
Interest payments relating to long-term debt 1 | 293.9 | | | 71.0 | | | 159.6 | | | 44.7 | | | 18.6 | |
| Operating lease liabilities | 84.5 | | | 25.1 | | | 34.6 | | | 14.4 | | | 10.4 | |
Pension and postretirement health care benefit funding 2 | 23.3 | | | 3.1 | | | 4.6 | | | 4.7 | | | 10.9 | |
Purchase obligations 3 | 239.1 | | | 224.7 | | | 14.4 | | | — | | | — | |
Other obligations 4 | 42.2 | | | 2.5 | | | 16.9 | | | 15.2 | | | 7.6 | |
| Total contractual cash obligations | $ | 2,573.6 | | | $ | 548.9 | | | $ | 355.1 | | | $ | 1,167.4 | | | $ | 502.2 | |
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| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (Dollars in millions) | Total | | Less Than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | After 5 Years |
| Contractual Obligations | | | | | |
| | |
| | |
| Long-term debt obligations | $ | 2,331.7 |
| | $ | 188.9 |
| | $ | 294.6 |
| | $ | 1,504.9 |
| | $ | 343.3 |
|
| Interest payments relating to long-term debt (1) | 403.3 |
| | 77.0 |
| | 137.7 |
| | 105.8 |
| | 82.8 |
|
| Operating lease obligations | 105.1 |
| | 31.7 |
| | 39.0 |
| | 20.8 |
| | 13.6 |
|
Pension and postretirement health care benefit funding (2) | 26.3 |
| | 2.8 |
| | 4.5 |
| | 4.7 |
| | 14.3 |
|
| Purchase obligations (3) | 182.3 |
| | 166.8 |
| | 15.5 |
| | — |
| | — |
|
| Other long-term liabilities (4) | 32.4 |
| | 0.1 |
| | 12.8 |
| | 12.8 |
| | 6.7 |
|
| Total contractual cash obligations | $ | 3,081.1 |
| | $ | 467.3 |
| | $ | 504.1 |
| | $ | 1,649.0 |
| | $ | 460.7 |
|
1 Interest payments on our long-term debt are projected based on the contractual rates of outstanding debt securities.
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(1) | Interest payments on our long-term debt are projected based on the contractual rates of outstanding debt securities. |
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(2) | Based on our funded status as of September 30, 2017, we are not required to make any further contributions to our master pension plan in fiscal 2018. |
2 Excludes our master defined benefit retirement plan in the United States because we are not required to make any further contributions in fiscal 2021.
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(3) | Purchase obligations represent contractual obligations under various take-or-pay arrangements executed in the normal course of business. These commitments represent future purchases in line with expected usage to obtain favorable pricing. Also included are obligations arising from purchase orders for which we have made firm commitments. As a result, we believe that the purchase obligations portion of our contractual obligations is substantially those obligations for which we are certain to pay, regardless of future facts and circumstances. We expect to fund purchase obligations with operating cash flows and current cash balances. |
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(4) | Other long-term liabilities include deferred compensation arrangements, self-insurance reserves, and other various liabilities. |
3 Purchase obligations represent contractual obligations under various take-or-pay arrangements executed in the normal course of business. These commitments represent future purchases in line with expected usage to obtain favorable pricing. Also included are obligations arising from purchase orders for which we have made firm commitments. As a result, we believe that the purchase obligations portion of our contractual obligations is substantially those obligations for which we are certain to pay, regardless of future facts and circumstances. We expect to fund purchase obligations with operating cash flows and current cash balances.
4 Other obligations include deferred compensation arrangements, self-insurance reserves and other various liabilities.
We also had commercial commitments related to standby letters of credit atas of September 30, 20172020 of $8.4$9.6 million.
In addition to the contractual obligations and commercial commitments disclosed above, we also have a variety of other agreements related to the procurement of materials and services and other commitments. While manyMany of these agreements are long-term supply agreements, some of which are exclusive supply or complete requirements-based contracts, we are not committed under these agreements to accept or pay for requirements which are not needed to meet production needs.contracts. Also, we have an additional $4.5$3.9 million of otherOther long-term liabilities as of September 30, 2017,2020, which represent uncertain tax positions for which it is not possible to determine in which future period the tax liability might be settled.
In conjunction with our acquisition and divestiture activities, we have entered into certain guarantees and indemnifications of performance, as well as, non-competition agreements for varying periods of time. Potential losses under the indemnifications are generally limited to a portion of the original transaction price, or to other lesser specific dollar amounts for certain provisions. Guarantees and indemnifications with respect to acquisition and divestiture activities, if triggered, could have a materiallyan adverse impact on our financial condition and results of operations.
We are also subject to potential losses from adverse litigation results that are not accounted for by aincluded in our self-insurance or other reserves; however,reserves, because such potential losses are not quantifiable at this time and may never occur.
Critical Accounting Policies and Estimates
Our accounting policies, including those described below, often require management to make significant estimates and assumptions using information available at the time the estimates are made. Such estimates and assumptions significantly affect various reported amounts of assets, liabilities, revenue and expenses. If future experience differs materiallysignificantly from these estimates and assumptions, our results of operations and financial condition could be affected. Our most critical accounting policies are described below.
Revenue Recognition
Net revenue reflects gross revenue less sales discounts and allowances and customer returns for product sales and rental revenue reserves. Revenue is evaluated underrecognized as performance obligations are satisfied, either at a point in time or over time, driven by the following criteria and recognized when each is met:
Evidence of an arrangement: An agreement with the customer reflecting the terms and conditions to deliver products or services serves as evidence of an arrangement.
Delivery: For products, delivery is generally considered to occur upon transfer of title and risk of loss per the respective sales terms. For rental services, delivery is considered to occur when the services are rendered.
Fixed or determinable price: The sales price is considered fixed or determinable if it is not subject to refund or adjustment.
Collection is deemed probable: At or prior to the time of a transaction, credit reviews of each customer are performed to determine the creditworthinessnature of the customer. Collectionobligation that is deemed probable if the customer is expectedcontracted to be ableprovided to pay amounts underour customers. Revenue is measured as the arrangement as those amounts become due. If collectionamount of consideration we expect to receive in exchange for transferring goods or providing services. A performance obligation is not probable, revenue is recognized when collection becomes probable, generally upon cash collection.
As a general interpretation of the above guidelines, revenue for health care and surgical products are generally recognized upon delivery of the productspromise in a contract to transfer a distinct good or service to the customer, and their assumptionis the unit of riskaccount in the contract. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Certain of loss and other risks and rewardsour contracts have multiple performance obligations. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of ownership. Local business customs and sales terms specific to certain customersthe standalone selling price of each distinct good or products can sometimes resultservice in deviations to this normal practice; however,the contract.
The majority of our capital equipment revenue is recognized at a point in no case is revenue recognized prior totime, primarily based on the transfer of risk of loss and rewards of ownership.
For non-invasive therapy products and medicaltitle, except in circumstances where we are also required to install the equipment, management services, the majority of product offerings are rental products for which revenue is recognized consistentupon customer acceptance of the installation. Performance obligations involving the provision of services and revenue from rental usage of our products are recognized over the time period specified in the contractual arrangement with the renderingcustomer. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation.
Revenue is presented net of the serviceseveral types of variable consideration including rebates, discounts and use of products. For The Vest ®product revenue is generally recognizedreturns, which are estimated at the time of receiptsale generally using the expected value method, although the most likely amount method is also used
for certain types of variable consideration. These estimates take into consideration historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns.
Certain costs associated with obtaining or fulfilling a contract are capitalized until such time as the related performance obligations are completed and the related revenue is recognized.
Contract liabilities represent deferred revenues that arise as a result of cash received from customers at inception of contracts or where the timing of billing fromfor services precedes satisfaction of our performance obligations. Such remaining performance obligations represent the applicable paying entity as this serves as evidenceportion of the arrangementcontract price for which work has not been performed and setsare primarily related to our installation and service contracts.
Taxes assessed by a fixed or determinable price.governmental authority that are directly imposed on a revenue producing transaction between us and our customers, including but not limited to sales taxes, use taxes and value added taxes, are excluded from revenue and cost.
For health care products and services aimed at improving operational efficiency and asset utilization, various revenue recognition techniques are used, depending on the offering. Arrangements to provide services, routinely under separately sold service and maintenance contracts, result in the deferral of revenue until specified services are performed. Service contract revenue is generally recognized ratably over the contract period, if applicable, or as services are rendered. Product-related goods are generally recognized upon delivery to the customer.
Revenue and Accounts Receivable Reserves
Revenue is presented in the Statements of Consolidated Income net of certain discounts, GPO fees, and sales adjustments. For product sales, we record reserves resulting in a reduction of revenue for contractual discounts, as well as price concessions and product returns. Likewise, rental revenue reserves, reflecting contractual and other routine billing adjustments, are recorded as a reduction of revenue. Reserves for revenue are estimated based upon historical rates for revenue adjustments.
Provisions for doubtful accounts are recorded as a component of operating expensesexpense and represent our best estimate of the amount of probable credit losses and collection risk in our existing accounts receivable. We determine such reserves based on historical write-off experience by industry. Receivables are generally reviewed on a pooled basisfor collectability based on historical collection experience for each receivable type and are also reviewed individually for collectability. Account balances are charged against the allowance when we believe it is probable the receivable will not be recovered. We do not have any off-balance sheet credit exposure related to our customers.
If circumstances change, such as higher than expected payment defaults, claims denials, payment defaults, changes in our business composition or processes, adverse changes in general economic conditions, instability or disruption of credit markets, or an unexpected material adverse change in a major customer’s or payer’s ability to meet its obligations, our estimates of the realizability of trade receivables could be reduced by a material amount.
Liabilities for Loss Contingencies Related to Lawsuits
We are involved on an ongoing basis in claims, investigations and lawsuits relating to our operations, including patent infringement, business practices, commercial transactions and other matters. The ultimate outcome of these actions cannot be predicted with certainty. An estimated loss from these contingencies is recognized when we believe it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. However, it is difficult to measure the actual loss that might be incurred related to claims, investigations and lawsuits. The ultimate outcome of these actions could have a material adverse effect on our financial condition, results of operations and cash flow.
We are also involved in other possible claims, including product and general liability, workers’ compensation, auto liability and employment related matters. Refer to Note 13 of our Consolidated Financial Statements for additional information.
The recorded amounts represent our best estimate of the costs we will incur in relation to such exposures, but it is possible that actual costs could differ from those estimates.
Business Combinations, Goodwill and Intangible Assets
We account forDue to our growth strategy, recent acquisitions and the significance of our goodwill on the Consolidated Balance Sheets, this is our most critical accounting estimate. Assets acquired businesses usingand liabilities assumed in a business combination are recorded at their estimated fair values on the acquisition methoddate of accounting. This method requires thatacquisition. The difference between the identifiablepurchase price amount and the net fair value of assets acquired and liabilities assumed be measured at theiris recognized as goodwill on the balance sheet if the purchase price exceeds the estimated net fair value with goodwill beingor as a bargain purchase gain on the excess value of consideration paidincome statement if the purchase price is less than the estimated net fair value. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment, often utilizes independent valuation experts and involves the net identifiable assets acquired. Judgmentsuse of significant estimates and estimates are requiredassumptions with respect to the timing and amounts of future cash inflows and outflows, discount rates, market prices and asset lives, among other items. The judgments made in the determination of the estimated fair value assigned to the assets acquired and liabilities assumed, as well as the estimated useful life of each asset and the duration of each liability, could significantly impact the financial statements in periods after acquisition, such as through depreciation and amortization expense. The allocation of the purchase price may be modified up to one year after the acquisition date as more information is obtained about the fair value of assets acquired and liabilities assumed. Fair values includingof acquired developed technology and customer relationships are estimated using the settingincome approach. Management applies significant judgment in estimating the fair value of discount rates,intangible assets acquired, which involved the use of significant estimates and assumptions with respect to the revenue growth rates, the obsolescence factors (specific to developed technology), the customer attrition rates (specific to customer relationships), and forecasted business results for the acquired business and portions of the acquired business, along with estimated useful lives.discount rates. Changes in these judgments or estimates can have a material impact on the valuation of the respective assets and liabilities acquired and our results of operations.
We perform an impairment assessment on goodwill and other indefinite-lived intangibles annually duringin the third fiscal quarter, or whenever events or changes in circumstances indicate that the carryingfair value of a reporting unit or indefinite-lived intangible may not be recoverable.below its carrying value. These events or conditions include, but are not limited to, a significant adverse change in the business environment; regulatory environment or legal factors; a current period operating or cash flow loss combined with a history of such losses or a projection of continuing losses; a substantial decline in market capitalization of our stock; or a sale or disposition of a significant portion of a reporting unit.
The goodwill and indefinite-lived intangible asset impairment assessment requiresassessments require either evaluating qualitative factors or performing a quantitative assessment to determine if a reporting unit’sthe carrying value is likely to exceed its fair value. The qualitative goodwill impairment assessment requires evaluating factors to determine that a reporting unit’s carrying value would not more likely than not exceedin excess of its fair value. As part of our goodwill qualitative testing process for each reporting unit, when utilized, we evaluate various factors that are specific to the reporting unit as well as industry and macroeconomic factors in order to determine whether it is reasonably likely to have a material impact on the fair value of our reporting units. Examples of thequalitative factors that are considered include the results ofand changes to assumptions used in the most recent quantitative impairment test, current and long-range forecastedprojected financial results, and changes in the strategic outlook or organizational structure of the reporting units.units or business unit for the indefinite-lived asset and industry macro-economic factors. The long-range financial forecasts of the reporting units, which are based upon management’s long-term view of our markets and are used by senior management and the Board of Directors to evaluate operating performance, are compared to the forecasts used in the prior year analysis to determine if management expectations for the business have changed. Management changes in strategic outlook or organizational structure represent internally driven strategic or organizational changes that could have a material impact on our results of operations or product offerings. Industry, market changes and macroeconomic indicators represent our view on changes outside of the Company that could have a material impact on our results of operations, product offerings or future cash flow forecasts. In the event we were to determine that a reporting unit’s or indefinite-lived intangible’s carrying value would more likely than not exceed its fair value, quantitative testing would be performed comparing carrying values to estimated fair values. Changes in management intentions, market conditions, operating performance and other similar circumstances could affect the assumptions used in this qualitative impairment test. Changes in the assumptions could result in impairment charges that could be material to our Consolidated Financial Statements in any given period.
Quantitative testing involves a two-step process. The first step, used to identify potential impairment, is a comparison of eachthe reporting unit’s estimated fair value to its carrying value, including goodwill. If the fair valueunits consists of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of the impairment. The second step requires us to calculate an implied fair value of goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excesscomparison of the fair value of the reporting unit, as determined inunits to their carrying value.
In determining the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the goodwill assigned to a reporting unit exceeds the impliedestimated fair value of the goodwill, anreporting units when performing a quantitative analysis, we consider both the market approach and the income approach. Under the market approach, we utilize the guideline company method, which involves calculating valuation multiples based on operating data from comparable publicly traded companies. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows utilizing a market-based discount rate determined separately for each reporting unit. To determine the estimated fair values of our reporting units, the Company uses assumptions and estimates including the determination of guideline companies and market multiples, projected sales, projected gross margins and discount rates.
An impairment charge is recorded for the excess.amount by which a reporting unit's carrying value exceeds the estimated fair value of the goodwill, not to exceed the carrying amount of its goodwill.
Measurementindefinite-lived intangibles consists of a comparison of the fair value of reporting unitsthe indefinite-lived intangible asset to its carrying value. We estimate the fair value of indefinite-lived intangibles using the relief-from-royalty method. The fair value derived is measured as the discounted cash flow savings realized from owning such trade names and not being required to pay a royalty for their use. Assumptions utilized in the first step of a quantitative impairment process requires significant management judgment with respect to forecasted sales, gross margin and selling, general and administrative expenses, capital expenditures, the selection and use of an appropriate discount rate, the selection of comparable public companies and the determination of an appropriate control premium. In addition,fair value include projected sales, discount rates and royalty rates. An impairment charge is recorded for the use of third-party appraisals of significant tangible and intangible assets as partamount the carrying value exceeds the estimated fair value of the second step of the impairment test also requires management judgment related to certain inputs and assumptions. indefinite-lived intangible.
There are inherent uncertainties related to each of the above listed assumptions and inputs, and our judgment in applying them. The use of differentChanges in the assumptions estimates or judgments in either step of the process could trigger the need for an impairment charge, or materially increase or decrease the amount of any such impairment charge.
Retirement Benefit Plans
We sponsor retirement and postretirement benefit plans covering select employees. Expense recognized in relation to these defined benefit retirement and postretirement health care plans is based upon actuarial valuations and inherent in those valuations are key assumptions including discount and mortality rates, and where applicable, expected returns on assets, projected future salary rates and projected health care cost trends. The discount rates used in the valuation of our defined benefit pensiongoodwill and postretirement plans are evaluated annually based on current market conditions. In setting these rates we utilize long-term bond indices and yield curves as a preliminary indication of interest rate movements, and then make adjustments to the respective indices to reflect differencesindefinite-lived intangible assets could result in the terms of the bonds covered under the indices in comparison to the projected outflow of our obligations. Our overall expected long-term rate of return on pension assets is based on historical and expected future returns, which are inflation adjusted and weighted for the expected return for each component of the investment portfolio. Our rate of assumed compensation increase is also based on our specific historical trends of past wage adjustments.
Changes in retirement and postretirement benefit expense and the recognized obligations may occur in the future as a result of a number of factors, including changes to any of these assumptions. Our expected rate of return on pension plan assets was 5.8% for fiscal 2017, 5.8% for fiscal 2016 and 6.8% for 2015. At September 30, 2017, we had pension plan assets of $284.4 million. A 25 basis point increase in the expected rate of return on pension plan assets reduces annual pension expense by approximately $0.6 million. Differences between actual and projected investment returns, especially in periods of significant market volatility, can also impact estimates of required pension contributions. The discount rate for our defined benefit pension plans obligation was 3.9% in 2017, 3.7% in 2016 and 4.4% in 2015. The discount rate for our postretirement obligations may vary up to 100 basis points fromimpairment charges that of our retirement obligations. For each 50 basis point change in the discount rate, the impact to annual pension expense ranges from an increase of $1.9 million to a decrease of $1.7 million, while the impactcould be material to our postretirement health care expense would be insignificant. Impacts from assumption changes could be positive or negative depending on the direction of the changeConsolidated Financial Statements in rates.
any given period.
Income Taxes
We compute our deferred income taxes using an asset and liability approach to reflect the net tax effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and the corresponding income tax amounts. We have a variety of deferred tax assets in numerous tax jurisdictions. These deferred tax assets are subject to periodic assessment as to recoverability and if it is determined that it is more likely than not that the benefits will not be realized, valuation allowances are recognized. In evaluating whether it is more likely than not that we would recover these deferred tax assets, future taxable income, the reversal of existing temporary differences and tax planning strategies are considered.
We believe that our estimates for the valuation allowances recorded against deferred tax assets are appropriate based on current facts and circumstances. As of September 30, 2017,2020, we had $58.2$50.8 million of valuation allowances on deferred tax assets, on a tax-effected basis, primarily related to certain foreign deferred tax attributes and state tax credit carryforwards as it is more likely than not that aresome portion or all of these tax attributes will not expected to be utilized.realized.
We account for uncertain income tax positions using a threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The difference between the tax benefit recognized in the financial statements for an uncertain income tax position and the tax benefit claimed in the tax return is referred to as an unrecognized tax benefit.
We also have on-going audits in various stages of completion with the IRS and several state and foreign jurisdictions, one or more of which may conclude within the next 12 months. Such settlements could involve some or all of the following: the payment of additional taxes and penalties, the adjustment of certain deferred taxes and/or the recognition of previously unrecognized tax benefits. The resolution of these matters, in combination with the expiration of certain statutes of limitations in various jurisdictions, make it reasonably possible that our unrecognized tax benefits may decrease as a result of either payment or recognition by approximately $0.5 millionof up to $1.0$1.8 million in the next twelve12 months, excluding interest.
Guarantees
We routinely grant limited warranties on our productsThe U.S. Internal Revenue Service and Treasury Department continue to release proposed guidance with respect to defects in materialthe Tax Act. We continue to evaluate what impact, if any, each piece of guidance may have on our related tax positions and workmanship. The terms of these warranties are generally one year, however, certain componentsour effective tax rate if, and products have substantially longer warranty periods. We recognize a reserve with respect to these obligations at the time of product sale, with subsequent warranty claims recorded directly against the reserve. The amount of the warranty reserve is determined based on historical trend experience for the covered products. For more significant warranty-related matters which might require a broad-based correction, separate reserves are established when, such events are identified and the cost of correction can be reasonably estimated.guidance is finalized.
Inventory
We review the net realizable value of inventory on an ongoing basis, considering factors such as excess, obsolescence, and other items. We record an allowance for estimated losses when the facts and circumstances indicate that particular inventories will not be sold at prices in excess of current carrying costs. These estimates are based on historical experience and expected future trends. If future market conditions vary from those projected, and our estimates prove to be inaccurate, we may be required to write down inventory values and record an adjustment to cost of revenue.
Recently Issued Accounting Guidance
For a summary of recently issued accounting guidance applicable to us, see Note 11. Summary of our Consolidated Financial Statements included under Part II, Item 8 of this Form 10-K.Significant Accounting Policies.
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Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including fluctuations in interest rates, collection risk associated with our accounts and notes receivable portfolio and variability in currency exchange rates. We have established policies, procedures, and internal processes governing our management of market risks and the use of financial instruments to manage our exposure to such risks.
We are subject to variability in foreign currency exchange rates indue to our international operations. Exposure to this variability is periodically managed primarily through the use of natural hedges, whereby funding obligations and assets are both managed in the local currency. We, fromFrom time-to-time, we enter into currency exchange agreementscontracts to manage our exposureexposures arising from fluctuating exchange rates related to specific and forecasted transactions. We operate this program pursuant to documented corporate risk management policies and do not enter into derivative transactions for speculative purposes. The sensitivity of earnings and cash flows to variability in exchange rates is assessed by applying an appropriate range of potential rate fluctuations to our assets, obligations and projected results of operations denominated in foreign currencies.
Our currency risk consists primarily of foreign currency denominated firm commitments and forecasted foreign currency denominated intercompany and third-party transactions. At September 30, 2017, the notional amount of open foreign exchange contracts was $6.7 million. These contracts were in a net liability position with an aggregate fair value of $0.5 million. The maximum length of time over which we hedge transaction exposures is generally 15 months. Derivative gains/(losses),gains and losses, initially reported as a component of Accumulated Other Comprehensive Loss,other comprehensive income (loss), are reclassified to earnings in the period when the transaction affects earnings.
Refer to Note 46. Derivative Instruments and Hedging Activity and Note 6 of our Consolidated Financial Statements8. Retirement and Postretirement Benefit Plans for additional discussions about our interest rate swapderivative agreements and our pension plan assets. We may need to make additional pension plan contributions and our pension expense in future years may increase if market volatility and disruption causes declines in asset values and low interest rates result in a high pension obligation. Investment strategies and policies are set by the plan’s fiduciaries. Long-term strategic investment objectives utilize a diversified mix of equity and fixed income securities to preserve the funded status of the trusts and balance risk and return. The plan fiduciaries oversee the investment allocation process, which includes selecting investment managers, setting long-term strategic targets and monitoring asset allocations.
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Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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| All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto. | |
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting for Hill-Rom Holdings, Inc. ("we"(“we” or "our"“our”). Our internal control over financial reporting is a process designed, under the supervision of our principal executive, principal financial and principal accounting officers, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our Consolidated Financial Statements for external purposes in accordance with accounting principles generally accepted in the United States. Our internal control over financial reporting includes policies and procedures that:
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1) | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
1)Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
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2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States and that our receipts and expenditures are being made only in accordance with authorizations of our management and our Board of Directors; and |
| |
3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our Consolidated Financial Statements. |
2)Provide reasonable assurance that transactions are recorded as necessary to permit preparation of our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States and that our receipts and expenditures are being made only in accordance with authorizations of our management and our Board of Directors; and
3)Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our Consolidated Financial Statements.
Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management performed an assessment of the effectiveness of our internal control over financial reporting as of September 30, 20172020 using criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on these criteria, management concluded that we maintained effective internal control over financial reporting as of September 30, 2017.2020.
The effectiveness of our internal control over financial reporting as of September 30, 20172020 has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, who also audited our Consolidated Financial Statements, as stated in their report included herein.
We have excluded Mortara Instrument, Inc. ("Mortara") from our assessment of internal control over financial reporting as of September 30, 2017, because Mortara was acquired by us in a purchase business combination in the second quarter of 2017. Mortara is a wholly-owned subsidiary whose total assets and total revenues represent approximately 2.0% and 2.5%, respectively, of the related consolidated financial statement amounts as of and for the year ended September 30, 2017.
/s/ John J. GreischP. Groetelaars
John J. GreischP. Groetelaars
President and Chief Executive Officer
/s/ Steven J. StrobelBarbara W. Bodem
Steven J. StrobelBarbara W. Bodem
Senior Vice President and Chief Financial Officer
/s/ Jason A. RichardsonRichard M. Wagner
Jason A. RichardsonRichard M. Wagner
Vice President, Controller and Chief Accounting Officer
Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors and Shareholders of
Hill-Rom Holdings, Inc.
In our opinion,Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Hill-Rom Holdings, Inc. and its subsidiaries (the “Company”) as of September 30, 2020 and 2019, and the related consolidated statements of income, of comprehensive income (loss), shareholders’of shareholders' equity and cash flows present fairly, in all material respects, the financial position of Hill-Rom Holdings, Inc. and its subsidiaries ("the Company") as of September 30, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 20172020, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended September 30, 2020 listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2020 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying indexpresents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2017,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations ofCOSO.
Changes in Accounting Principles
As discussed in Note 1 to the Treadway Commission (COSO). consolidated financial statements, the Company changed the manner in which it accounts for leases in fiscal 2020 and the manner in which it accounts for revenues from contracts with customers in fiscal 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management'sManagement’s Report on Internal Control overOver Financial Reporting. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 7 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in 2017.Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment - Reporting Unit Which Comprises the Surgical Solutions Reportable Segment
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Mortara Instrument, Inc. ("Mortara") from its assessment of internal control overNotes 1 and 4 to the consolidated financial reportingstatements, the Company’s consolidated goodwill balance as of September 30, 2017, because it2020 was acquired$1,836 million. The goodwill associated with the Surgical Solutions reportable segment as of September 30, 2020 was $222 million. As disclosed by management, an impairment assessment is performed on goodwill annually in the Companythird fiscal quarter, or whenever events or changes in circumstances indicate that the fair value of a purchase business combination during 2017. We have also excluded Mortara fromreporting unit may be below its carrying value. To determine the estimated fair values of the Company’s reporting units, management considers both the market and income approach, which require management to develop assumptions and estimates including the determination of guideline companies and market multiples, projected sales, projected gross margins, and discount rates.
The principal considerations for our auditdetermination that performing procedures relating to the goodwill impairment assessment of internal control over financial reporting. Mortarathe reporting unit which comprises the Surgical Solutions reportable segment is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and ourcritical audit of internal control over financial reporting represent approximately 2.0% and 2.5%, respectively,matter are the significant judgment by management when developing the fair value measurement of the reporting unit; this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to the determination of guideline companies and market multiples, projected sales, projected gross margins, and the discount rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statement amounts asstatements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s reporting unit and controls over the development of the assumptions related to the guideline companies and market multiples, projected sales, projected gross margins, and the discount rate. These procedures also included, among others, testing management’s process for developing the year ended September 30, 2017.fair value estimate; evaluating the appropriateness of both the market and income approach; testing the completeness, accuracy, and relevance of underlying data used; and evaluating the significant assumptions used by management related to the determination of guideline companies and market multiples, projected sales, projected gross margins, and the discount rate. Evaluating management’s assumptions related to projected sales and projected gross margins involved evaluating whether the assumptions utilized were reasonable considering (i) the current and past performance of the business, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating the Company’s market and income approaches, the determination of guideline companies and market multiples, and the discount rate.
/s/ PricewaterhouseCoopers LLP
Indianapolis, IndianaChicago, Illinois
November 17, 201713, 2020
We have served as the Company’s auditor since 1985.
Hill-Rom Holdings, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME
(In millions, except per share data)
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2020 | | 2019 | | 2018 |
| Net Revenue | | | | | | |
| Product sales and service | | $ | 2,571.2 | | | $ | 2,615.0 | | | $ | 2,469.6 | |
| Rental revenue | | 309.8 | | | 292.3 | | | 378.4 | |
| Total net revenue | | 2,881.0 | | | 2,907.3 | | | 2,848.0 | |
| | | | | | |
| Cost of Net Revenue | | | | | | |
| Cost of goods sold | | 1,259.9 | | | 1,330.7 | | | 1,274.1 | |
| Rental expenses | | 146.0 | | | 151.6 | | | 179.7 | |
| Total cost of net revenue (excludes acquisition-related intangible asset amortization) | | 1,405.9 | | | 1,482.3 | | | 1,453.8 | |
| | | | | | |
| | | | | | |
| | | | | | |
| Research and development expenses | | 136.5 | | | 139.5 | | | 135.6 | |
| Selling and administrative expenses | | 820.4 | | | 818.6 | | | 784.7 | |
| Acquisition-related intangible asset amortization | | 109.0 | | | 122.4 | | | 106.9 | |
| Special charges | | 41.5 | | | 28.4 | | | 77.6 | |
| Operating Profit | | 367.7 | | | 316.1 | | | 289.4 | |
| | | | | | |
| Interest expense | | (74.0) | | | (89.6) | | | (95.0) | |
| Loss on extinguishment of debt | | (15.6) | | | (3.3) | | | 0 | |
| Investment income (expense) and other, net | | (6.9) | | | (14.6) | | | 2.8 | |
| | | | | | |
| Income Before Income Taxes | | 271.2 | | | 208.6 | | | 197.2 | |
| | | | | | |
| Income tax expense (benefit) | | 48.2 | | | 56.4 | | | (55.2) | |
| | | | | | |
| Net Income | | $ | 223.0 | | | $ | 152.2 | | | $ | 252.4 | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net Income per Basic Common Share | | $ | 3.35 | | | $ | 2.28 | | | $ | 3.81 | |
| | | | | | |
| Net Income per Diluted Common Share | | $ | 3.32 | | | $ | 2.25 | | | $ | 3.73 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Average Basic Common Shares Outstanding (in thousands) | | 66,631 | | | 66,772 | | | 66,234 | |
| | | | | | |
| Average Diluted Common Shares Outstanding (in thousands) | | 67,212 | | | 67,660 | | | 67,612 | |
|
| | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2017 | | 2016 | | 2015 |
| Net Revenue | | | | | | |
| Product sales and service | | $ | 2,358.1 |
| | $ | 2,263.4 |
| | $ | 1,604.5 |
|
| Rental revenue | | 385.6 |
| | 391.8 |
| | 383.7 |
|
| Total revenue | | 2,743.7 |
| | 2,655.2 |
|
| 1,988.2 |
|
| | | | | | | |
| Cost of Revenue | | |
| | |
| | |
|
| Cost of goods sold | | 1,235.8 |
| | 1,209.4 |
| | 921.2 |
|
| Rental expenses | | 187.3 |
| | 188.8 |
| | 186.7 |
|
| Total cost of revenue | | 1,423.1 |
| | 1,398.2 |
| | 1,107.9 |
|
| | | | | | | |
| Gross Profit | | 1,320.6 |
|
| 1,257.0 |
|
| 880.3 |
|
| | | | | | | |
| Research and development expenses | | 133.7 |
| | 133.5 |
| | 91.8 |
|
| Selling and administrative expenses | | 876.1 |
| | 853.3 |
| | 664.2 |
|
| Special charges (Note 8) | | 37.4 |
| | 39.9 |
| | 41.2 |
|
| Operating Profit | | 273.4 |
|
| 230.3 |
|
| 83.1 |
|
| | | | | | | |
| Interest expense | | (88.9 | ) | | (90.4 | ) | | (18.4 | ) |
| Loss on extinguishment of debt | | — |
| | (10.8 | ) | | — |
|
| Investment income and other, net | | (1.5 | ) | | 9.2 |
| | 0.4 |
|
| | | | | | | |
| Income Before Income Taxes | | 183.0 |
|
| 138.3 |
|
| 65.1 |
|
| | | | | | | |
| Income tax expense (Note 9) | | 50.7 |
| | 15.5 |
| | 18.3 |
|
| | | | | | | |
| Net Income | | 132.3 |
|
| 122.8 |
|
| 46.8 |
|
| | | | | | | |
| Less: Net loss attributable to noncontrolling interests | | (1.3 | ) | | (1.3 | ) | | (0.9 | ) |
| | | | | | | |
| Net Income Attributable to Common Shareholders | | $ | 133.6 |
| | $ | 124.1 |
| | $ | 47.7 |
|
Net Income Attributable to Common Shareholders
per Common Share - Basic | | $ | 2.04 |
| | $ | 1.90 |
| | $ | 0.83 |
|
Net Income Attributable to Common Shareholders
per Common Share - Diluted | | $ | 1.99 |
| | $ | 1.86 |
| | $ | 0.82 |
|
| | | | | | | |
| Dividends per Common Share | | $ | 0.7100 |
| | $ | 0.6700 |
| | $ | 0.6325 |
|
| | | | | | | |
| Average Common Shares Outstanding - Basic (thousands) (Note 10) | | 65,599 |
| | 65,333 |
| | 57,249 |
|
| | | | | | | |
| Average Common Shares Outstanding - Diluted (thousands) (Note 10) | | 67,225 |
| | 66,596 |
| | 58,536 |
|
See Notes to Consolidated Financial Statements.Statements
Hill-Rom Holdings, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(In millions)
|
| | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2017 | | 2016 | | 2015 |
| | | | | | | |
| Net Income | | $ | 132.3 |
| | $ | 122.8 |
| | $ | 46.8 |
|
| | | | | | | |
| Other Comprehensive Income (Loss), Net of Tax: | | |
| | |
| | |
|
| | | | | | | |
| Available-for-sale securities and hedges | | 7.4 |
| | (3.1 | ) | | — |
|
| Foreign currency translation adjustment | | 33.9 |
| | (22.4 | ) | | (58.6 | ) |
| Change in pension and postretirement defined benefit plans | | 17.8 |
| | (2.8 | ) | | (8.1 | ) |
| Total Other Comprehensive Income (Loss), Net of Tax | | 59.1 |
| | (28.3 | ) | | (66.7 | ) |
| | | | | | | |
| Total Comprehensive Income (Loss) | | 191.4 |
| | 94.5 |
| | (19.9 | ) |
| | | | | | | |
| Less: Comprehensive loss attributable to noncontrolling interests | | (1.3 | ) | | (1.3 | ) | | (0.9 | ) |
| | | | | | | |
| Total Comprehensive Income (Loss) Attributable to Common Shareholders | | $ | 192.7 |
| | $ | 95.8 |
| | $ | (19.0 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2020 | | 2019 | | 2018 |
| | | | | | |
| Net Income | | $ | 223.0 | | | $ | 152.2 | | | $ | 252.4 | |
| | | | | | |
| Other Comprehensive Income (Loss), net of tax: | | | | | | |
| | | | | | |
| Derivative instruments designated as hedges | | (36.5) | | | (10.4) | | | 12.5 | |
| Foreign currency translation adjustment | | 34.7 | | | (40.1) | | | (24.0) | |
| Change in pension and postretirement defined benefit plans | | 4.1 | | | (13.6) | | | 8.5 | |
| Total Other Comprehensive Income (Loss), net of tax | | 2.3 | | | (64.1) | | | (3.0) | |
| | | | | | |
| Total Comprehensive Income | | $ | 225.3 | | | $ | 88.1 | | | $ | 249.4 | |
| | | | | | |
| | | | | | |
| | | | | | |
See Notes to Consolidated Financial Statements.Statements
Hill-Rom Holdings, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts) |
| | | | | | | | |
| (In millions, except share amounts) | | September 30 |
| | | 2017 | | 2016 |
| ASSETS | | | | |
| Current Assets | | | | |
| Cash and cash equivalents | | $ | 231.8 |
| | $ | 232.2 |
|
| Trade accounts receivable, less allowances of $25.1 in 2017 and $26.8 in 2016 (Note 1) | | 579.3 |
| | 515.1 |
|
| Inventories (Note 1) | | 284.5 |
| | 252.0 |
|
| Other current assets | | 70.6 |
| | 82.8 |
|
| Total current assets | | 1,166.2 |
| | 1,082.1 |
|
| Property, plant, and equipment (Note 1) | | 979.6 |
| | 961.8 |
|
| Less accumulated depreciation | | (624.2 | ) | | (611.8 | ) |
| Property, plant, and equipment, net | | 355.4 |
| | 350.0 |
|
| Intangible assets: | | |
| | |
|
| Goodwill (Notes 1, 2 and 3) | | 1,759.6 |
| | 1,584.4 |
|
| Other intangible assets and software, net (Notes 1, 2 and 3) | | 1,144.0 |
| | 1,143.3 |
|
| Deferred income taxes (Notes 1 and 9) | | 40.9 |
| | 43.1 |
|
| Other assets | | 62.6 |
| | 59.5 |
|
| Total Assets | | $ | 4,528.7 |
| | $ | 4,262.4 |
|
| LIABILITIES | | |
| | |
|
| Current Liabilities | | |
| | |
|
| Trade accounts payable | | $ | 167.9 |
| | $ | 136.0 |
|
| Short-term borrowings (Note 4) | | 188.9 |
| | 210.1 |
|
| Accrued compensation | | 126.9 |
| | 127.0 |
|
| Accrued product warranties (Note 1) | | 25.5 |
| | 27.5 |
|
| Accrued rebates | | 39.7 |
| | 40.8 |
|
| Other current liabilities | | 109.8 |
| | 120.9 |
|
| Total current liabilities | | 658.7 |
| | 662.3 |
|
| | | | | |
| Long-term debt (Note 4) | | 2,120.4 |
| | 1,938.4 |
|
| Accrued pension and postretirement benefits (Note 6) | | 78.1 |
| | 99.0 |
|
| Deferred income taxes (Notes 1 and 9) | | 266.2 |
| | 287.8 |
|
| Other long-term liabilities | | 39.7 |
| | 39.0 |
|
| Total Liabilities | | 3,163.1 |
| | 3,026.5 |
|
| Commitments and Contingencies (Note 13) | |
|
| |
|
|
| SHAREHOLDERS' EQUITY (Note 7) | | |
| | |
|
| Capital Stock: | | |
| | |
|
| Preferred stock - without par value: | | |
| | |
|
| Authorized - 1,000,000 shares; none issued or outstanding | |
|
| |
|
|
| Common stock - without par value: | | |
| | |
|
| Authorized - 199,000,000 | | |
| | |
|
| Issued - 88,457,634 shares in 2017 and 2016 | | 4.4 |
| | 4.4 |
|
| Additional paid-in capital | | 584.4 |
| | 575.9 |
|
| Retained earnings | | 1,676.2 |
| | 1,589.7 |
|
| Accumulated other comprehensive loss (Note 1) | | (110.0 | ) | | (169.1 | ) |
| Treasury stock, common shares at cost: 22,643,840 and 22,752,381 | | (796.8 | ) | | (773.7 | ) |
| Total Shareholders' Equity Attributable to Common Shareholders | | 1,358.2 |
| | 1,227.2 |
|
| Noncontrolling interests | | 7.4 |
| | 8.7 |
|
| Total Shareholders' Equity | | 1,365.6 |
| | 1,235.9 |
|
| Total Liabilities and Shareholders' Equity | | $ | 4,528.7 |
| | $ | 4,262.4 |
|
| | | | | | | | | | | | | | |
| | September 30,
2020 | | September 30, 2019 |
| ASSETS | | | | |
| Current Assets | | | | |
| Cash and cash equivalents | | $ | 296.5 | | | $ | 214.1 | |
| Restricted cash | | 0 | | | 419.7 | |
| Trade accounts receivable, net of allowances of $25.9 and $20.6 in fiscal 2020 and 2019 | | 594.9 | | | 653.3 | |
| Inventories, net of reserves of $73.0 and $57.3 in fiscal 2020 and 2019 | | 352.0 | | | 269.6 | |
| | | | |
| Other current assets | | 121.5 | | | 106.7 | |
| Total current assets | | 1,364.9 | | | 1,663.4 | |
| Property, plant and equipment | | 858.2 | | | 829.6 | |
| Less accumulated depreciation | | (552.1) | | | (532.8) | |
| Property, plant and equipment, net | | 306.1 | | | 296.8 | |
| | | | |
| Goodwill | | 1,835.5 | | | 1,800.9 | |
| Other intangible assets and software, net | | 976.7 | | | 1,033.5 | |
| Deferred income taxes | | 32.9 | | | 33.1 | |
| Other assets | | 155.0 | | | 91.3 | |
| Total Assets | | $ | 4,671.1 | | | $ | 4,919.0 | |
| LIABILITIES | | | | |
| Current Liabilities | | | | |
| Trade accounts payable | | $ | 236.5 | | | $ | 197.6 | |
| Short-term borrowings | | 222.3 | | | 660.4 | |
| Accrued compensation | | 144.9 | | | 130.4 | |
| Accrued product warranties | | 30.8 | | | 29.7 | |
| Accrued rebates | | 44.8 | | | 47.7 | |
| Deferred revenue | | 110.1 | | | 107.3 | |
| Other current liabilities | | 162.8 | | | 95.2 | |
| Total current liabilities | | 952.2 | | | 1,268.3 | |
| | | | |
| Long-term debt | | 1,655.7 | | | 1,783.1 | |
| Accrued pension and postretirement benefits | | 89.3 | | | 80.8 | |
| Deferred income taxes | | 113.0 | | | 143.0 | |
| Other long-term liabilities | | 134.8 | | | 70.5 | |
| Total Liabilities | | 2,945.0 | | | 3,345.7 | |
| Commitments and Contingencies | | | | |
| SHAREHOLDERS' EQUITY | | | | |
| Capital Stock: | | | | |
| Preferred stock - without par value: Authorized - 1,000,000 shares; none issued or outstanding | | | | |
| | | | |
| Common stock - without par value: Authorized - 199,000,000 | | 4.4 | | | 4.4 | |
| | | | |
| Issued - 88,457,634 shares as of September 30, 2020 and September 30, 2019; Outstanding: 66,640,832 shares as of September 30, 2020 and 66,625,011 shares as of September 30, 2019 | | | | |
| Additional paid-in capital | | 667.0 | | | 637.4 | |
| Retained earnings | | 2,132.2 | | | 1,967.4 | |
| Accumulated other comprehensive income (loss) | | (180.2) | | | (182.5) | |
| Treasury stock, common shares at cost: 21,816,802 as of September 30, 2020 and 21,832,623 as of September 30, 2019 | | (897.3) | | | (853.4) | |
| Total Shareholders’ Equity | | 1,726.1 | | | 1,573.3 | |
| Total Liabilities and Shareholders' Equity | | $ | 4,671.1 | | | $ | 4,919.0 | |
See Notes to Consolidated Financial Statements.
Statements
Hill-Rom Holdings, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS
|
| | | | | | | | | | | | |
| (In millions) | | Year Ended September 30 |
| | | 2017 | | 2016 | | 2015 |
| Operating Activities | | | | | | |
| Net income | | $ | 132.3 |
| | $ | 122.8 |
| | $ | 46.8 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| | |
| | |
| Depreciation | | 82.0 |
| | 86.2 |
| | 73.6 |
|
| Amortization | | 20.4 |
| | 26.9 |
| | 10.5 |
|
| Acquisition-related intangible asset amortization | | 108.4 |
| | 95.9 |
| | 34.1 |
|
| Loss on extinguishment of debt | | — |
| | 10.8 |
| | — |
|
| Provision for deferred income taxes | | (32.8 | ) | | (0.5 | ) | | (22.3 | ) |
| Loss on disposal of property, equipment leased to others, intangible assets and impairments | | 24.7 |
| | 1.9 |
| | 0.5 |
|
| Pension settlement charge | | — |
| | — |
| | 9.6 |
|
| Pension contribution to master pension plan | | — |
| | (30.0 | ) | | — |
|
| Gain on sale of businesses | | (1.0 | ) | | (10.1 | ) | | — |
|
| Stock compensation | | 23.0 |
| | 23.1 |
| | 25.0 |
|
| Excess tax benefits from employee stock plans | | — |
| | (3.6 | ) | | (3.6 | ) |
| Change in working capital excluding cash, current debt, acquisitions and dispositions: | | | | | | |
| Trade accounts receivable | | (42.5 | ) | | (15.8 | ) | | (39.7 | ) |
| Inventories | | (14.9 | ) | | 21.3 |
| | 11.0 |
|
| Other current assets | | 15.0 |
| | 27.7 |
| | (7.7 | ) |
| Trade accounts payable | | 21.6 |
| | (0.5 | ) | | 0.7 |
|
| Accrued expenses and other liabilities | | (32.3 | ) | | (73.0 | ) | | 53.8 |
|
| Other, net | | 7.2 |
| | (1.9 | ) | | 21.5 |
|
| Net cash provided by operating activities | | 311.1 |
| | 281.2 |
| | 213.8 |
|
| Investing Activities | | |
| | |
| | |
|
| Capital expenditures and purchases of intangible assets | | $ | (97.5 | ) | | $ | (83.3 | ) | | $ | (121.3 | ) |
| Proceeds on sale of property and equipment leased to others | | 15.1 |
| | 2.2 |
| | 1.5 |
|
| Payment for acquisition of businesses, net of cash acquired | | (311.4 | ) | | (25.3 | ) | | (1,638.7 | ) |
| Proceeds on sale of businesses | | 5.8 |
| | 10.3 |
| | — |
|
| Other | | (1.4 | ) | | (1.6 | ) | | 2.1 |
|
| Net cash used in investing activities | | (389.4 | ) | | (97.7 | ) |
| (1,756.4 | ) |
| Financing Activities | | |
| | |
| | |
|
| Proceeds from borrowings on long-term debt | | $ | 300.0 |
| | $ | 530.4 |
| | $ | 2,225.0 |
|
| Payment of long-term debt | | (73.2 | ) | | (767.9 | ) | | (401.6 | ) |
| Net change in short-term debt | | — |
| | — |
| | (0.7 | ) |
| Borrowings on Revolving Credit Facility | | 180.0 |
| | 156.9 |
| | 95.0 |
|
| Payments on Revolving Credit Facility | | (325.8 | ) | | (20.0 | ) | | (135.0 | ) |
| Borrowings on Securitization Program | | 124.5 |
| | — |
| | — |
|
| Payments on Securitization Program | | (45.4 | ) | | — |
| | — |
|
| Repurchase of registered debentures | | — |
| | — |
| | (5.9 | ) |
| Debt issuance costs | | (5.1 | ) | | (2.3 | ) | | (50.3 | ) |
| Purchase of noncontrolling interest of former joint venture | | — |
| | (0.4 | ) | | (1.9 | ) |
| Payment of cash dividends | | (46.6 | ) | | (43.8 | ) | | (37.1 | ) |
| Proceeds from exercise of stock options | | 17.8 |
| | 6.2 |
| | 12.1 |
|
| Proceeds from stock issuance | | 5.0 |
| | 3.8 |
| | 2.8 |
|
| Excess tax benefits from employee stock plans | | — |
| | 3.6 |
| | 3.6 |
|
| Treasury stock acquired | | (60.6 | ) | | (8.4 | ) | | (63.3 | ) |
| Net cash provided by (used in) financing activities | | 70.6 |
|
| (141.9 | ) |
| 1,642.7 |
|
| Effect of exchange rate changes on cash | | 7.3 |
| | (2.2 | ) | | (6.6 | ) |
| Net Cash Flows | | (0.4 | ) |
| 39.4 |
|
| 93.5 |
|
| Cash and Cash Equivalents | | |
| | |
| | |
|
| At beginning of period | | 232.2 |
| | 192.8 |
| | 99.3 |
|
| At end of period | | $ | 231.8 |
|
| $ | 232.2 |
|
| $ | 192.8 |
|
| Supplemental cash flow information: | | |
| | |
| | |
|
| Cash paid for income taxes | | $ | 70.4 |
| | $ | 10.9 |
| | $ | 49.1 |
|
| Cash paid for interest | | $ | 81.3 |
| | $ | 80.9 |
| | $ | 6.3 |
|
| | | | | | | |
| Non-cash investing and financing activities: | | |
| | |
| | |
|
| Treasury stock issued under stock compensation plans | | $ | 37.5 |
| | $ | 23.3 |
| | $ | 32.4 |
|
| Common stock issued for acquisition of businesses | | $ | — |
| | $ | — |
| | $ | 416.3 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30 |
| | 2020 | | 2019 | | 2018 |
| Operating Activities | | | | | | |
| Net income | | $ | 223.0 | | | $ | 152.2 | | | $ | 252.4 | |
| Adjustments to reconcile net income to net cash, cash equivalents and restricted cash provided by operating activities: | | | | | | |
| Depreciation and amortization of property, plant, equipment and software | | 69.8 | | | 72.4 | | | 89.6 | |
| Acquisition-related intangible asset amortization | | 109.0 | | | 122.4 | | | 106.9 | |
| Amortization of debt discounts and issuance costs | | 4.0 | | | 7.1 | | | 7.4 | |
| Loss on extinguishment of debt | | 15.6 | | | 3.0 | | | 0 | |
| Benefit for deferred income taxes | | (19.0) | | | (18.8) | | | (84.8) | |
| Loss on disposal of property, equipment, intangible assets, and impairments | | 2.7 | | | 3.4 | | | 2.7 | |
| | | | | | |
| Stock compensation | | 38.4 | | | 34.4 | | | 28.1 | |
| | | | | | |
| Other operating activities | | 27.1 | | | 28.3 | | | 34.1 | |
| Change in working capital excluding cash, current debt, acquisitions and dispositions: | | | | | | |
| Trade accounts receivable | | 71.3 | | | (62.3) | | | (7.7) | |
| Inventories | | (91.8) | | | (0.9) | | | (18.7) | |
| Other current assets | | (14.8) | | | 15.7 | | | (29.4) | |
| Trade accounts payable | | 24.0 | | | 13.2 | | | 12.5 | |
| Accrued expenses and other liabilities | | 15.4 | | | 28.8 | | | (1.6) | |
| Other assets and liabilities | | 7.0 | | | 2.5 | | | 3.7 | |
| Net cash, cash equivalents and restricted cash provided by operating activities | | 481.7 | | | 401.4 | | | 395.2 | |
| Investing Activities | | | | | | |
| Purchases of property, plant, equipment and software | | (105.9) | | | (73.4) | | | (89.5) | |
| Proceeds on sale of property and equipment | | 2.5 | | | 2.9 | | | 4.2 | |
| Payment for acquisition of businesses, net of cash acquired | | (28.4) | | | (303.4) | | | 0 | |
| Payments for acquisition of intangible assets | | 0 | | | (17.1) | | | 0 | |
| Payments for acquisition of investments | | 0 | | | (26.6) | | | 0 | |
| Proceeds on sale of businesses | | 0.8 | | | 166.6 | | | 1.0 | |
| Other investing activities | | (0.2) | | | 2.0 | | | 1.9 | |
| Net cash, cash equivalents and restricted cash used in investing activities | | (131.2) | | | (249.0) | | | (82.4) | |
| Financing Activities | | | | | | |
| Proceeds from borrowing on long-term debt | | 0 | | | 1,000.0 | | | 1.0 | |
| Payments of long-term debt | | (50.1) | | | (1,038.5) | | | (351.0) | |
| Borrowings on Revolving Credit Facility | | 190.0 | | | 420.0 | | | 75.0 | |
| Payments on Revolving Credit Facility | | (270.0) | | | (340.0) | | | (165.0) | |
| Borrowings on Securitization Facility | | 17.7 | | | 5.5 | | | 71.6 | |
| Payments on Securitization Facility | | (45.5) | | | (5.5) | | | (40.7) | |
| Borrowings on Note Securitization Facility | | 32.6 | | | 68.9 | | | 122.4 | |
| Payments on Note Securitization Facility | | (21.2) | | | (62.7) | | | (50.0) | |
| Proceeds from issuance of senior unsecured notes | | 0 | | | 425.0 | | | 0 | |
| Payment of debt issuance costs | | 0 | | | (12.7) | | | (0.4) | |
| Prepayment premium on extinguishment of 5.75% Notes | | (12.2) | | | 0 | | | 0 | |
| Redemption of 5.75% Notes | | (425.0) | | | 0 | | | 0 | |
| Cash dividends | | (58.0) | | | (55.4) | | | (51.8) | |
| Proceeds on exercise of stock options | | 8.6 | | | 14.5 | | | 40.0 | |
| | | | | | |
| Stock repurchases for stock award withholding obligations | | (16.5) | | | (4.7) | | | (14.1) | |
| Stock repurchases in the open market | | (54.1) | | | (117.2) | | | 0 | |
| Other financing activities | | 8.7 | | | 7.5 | | | 6.4 | |
| Net cash, cash equivalents and restricted cash (used in) provided by financing activities | | (695.0) | | | 304.7 | | | (356.6) | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | | 7.2 | | | (6.3) | | | (5.0) | |
| Net Cash Flows | | (337.3) | | | 450.8 | | | (48.8) | |
| Cash, Cash Equivalents and Restricted Cash: | | | | | | |
| At beginning of period | | 633.8 | | | 183.0 | | | 231.8 | |
| At end of period | | $ | 296.5 | | | $ | 633.8 | | | $ | 183.0 | |
See Notes to Consolidated Financial Statements.
Statements
Hill-Rom Holdings, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY
(In millions, except share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional
Paid-in Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Common Stock
in Treasury | | Total Equity
Attributable to Common
Shareholders | | Noncontrolling
Interests | | |
| | Shares
Outstanding | | Amount | | | | | | | | |
| | | | | | Shares | | Amount | | | | Total |
| Balance at September 30, 2014 | 57,439,911 |
| | $ | 4.4 |
| | $ | 134.1 |
| | $ | 1,499.8 |
| | $ | (74.1 | ) | | 22,884,001 |
| | $ | (757.7 | ) | | $ | 806.5 |
| | $ | — |
| | $ | 806.5 |
|
| Net Income Attributable to Common Shareholders | — |
| | — |
| | — |
| | 47.7 |
| | — |
| | — |
| | — |
| | 47.7 |
| | (0.9 | ) | | 46.8 |
|
| Consolidation of noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10.9 |
| | 10.9 |
|
| Other comprehensive loss, net of tax of $5.1 | — |
| | — |
| | — |
| | — |
| | (66.7 | ) | | — |
| | — |
| | (66.7 | ) | | — |
| | (66.7 | ) |
| Dividends | — |
| | — |
| | 0.5 |
| | (37.6 | ) | | — |
| | — |
| | — |
| | (37.1 | ) | | — |
| | (37.1 | ) |
| Issuance of common stock | 8,133,722 |
| | — |
| | 416.3 |
| | — |
| | — |
| | — |
| | — |
| | 416.3 |
| | — |
| | 416.3 |
|
| Treasury shares acquired | (1,373,321 | ) | | — |
| | — |
| | — |
| | — |
| | 1,373,321 |
| | (63.3 | ) | | (63.3 | ) | | — |
| | (63.3 | ) |
| Stock awards and option exercises | 965,584 |
| | — |
| | 11.1 |
| | — |
| | — |
| | (965,584 | ) | | 32.4 |
| | 43.5 |
| | — |
| | 43.5 |
|
| Balance at September 30, 2015 | 65,165,896 |
| | 4.4 |
| | 562.0 |
| | 1,509.9 |
| | (140.8 | ) | | 23,291,738 |
| | (788.6 | ) | | 1,146.9 |
| | 10.0 |
| | 1,156.9 |
|
| Net Income Attributable to Common Shareholders | — |
| | — |
| | — |
| | 124.1 |
| | — |
| | — |
| | — |
| | 124.1 |
| | (1.3 | ) | | 122.8 |
|
| Other comprehensive loss, net of tax of $3.2 | — |
| | — |
| | — |
| | — |
| | (28.3 | ) | | — |
| | — |
| | (28.3 | ) | | — |
| | (28.3 | ) |
| Dividends | — |
| | — |
| | 0.5 |
| | (44.3 | ) | | — |
| | — |
| | — |
| | (43.8 | ) | | — |
| | (43.8 | ) |
| Treasury shares acquired | (148,203 | ) | | — |
| | — |
| | — |
| | — |
| | 148,203 |
| | (8.4 | ) | | (8.4 | ) | | — |
| | (8.4 | ) |
| Stock awards and option exercises | 687,560 |
| | — |
| | 13.4 |
| | — |
| | — |
| | (687,560 | ) | | 23.3 |
| | 36.7 |
| | — |
| | 36.7 |
|
| Balance at September 30, 2016 | 65,705,253 |
| | 4.4 |
| | 575.9 |
| | 1,589.7 |
| | (169.1 | ) | | 22,752,381 |
| | (773.7 | ) | | 1,227.2 |
| | 8.7 |
| | 1,235.9 |
|
| Net Income Attributable to Common Shareholders | — |
| | — |
| | — |
| | 133.6 |
| | — |
| | — |
| | — |
| | 133.6 |
| | (1.3 | ) | | 132.3 |
|
| Other comprehensive loss, net of tax of $(14.6) | — |
| | — |
| | — |
| |
|
| | 59.1 |
| | — |
| | — |
| | 59.1 |
| | — |
| | 59.1 |
|
| Dividends | — |
| | — |
| | 0.5 |
| | (47.1 | ) | | — |
| | — |
| | — |
| | (46.6 | ) | | — |
| | (46.6 | ) |
| Treasury shares acquired | (976,473 | ) | | — |
| | — |
| | — |
| | — |
| | 976,473 |
| | (60.6 | ) | | (60.6 | ) | | — |
| | (60.6 | ) |
| Stock awards and option exercises | 1,085,014 |
| | — |
| | 8.0 |
| |
|
| | — |
| | (1,085,014 | ) | | 37.5 |
| | 45.5 |
| | — |
| | 45.5 |
|
| Balance at September 30, 2017 | 65,813,794 |
| | $ | 4.4 |
| | $ | 584.4 |
| | $ | 1,676.2 |
| | $ | (110.0 | ) | | 22,643,840 |
| | $ | (796.8 | ) | | $ | 1,358.2 |
| | $ | 7.4 |
| | $ | 1,365.6 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional
Paid-in Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | | | Treasury Stock | | Noncontrolling
Interests | | |
| Shares
Issued | | Amount | | | | | | | | | |
| | | | | | | | | | Total |
| Balance as of September 30, 2017 | 88,457,634 | | | $ | 4.4 | | | $ | 584.4 | | | $ | 1,676.2 | | | $ | (110.0) | | | | | $ | (796.8) | | | $ | 7.4 | | | $ | 1,365.6 | |
| Net income | — | | | — | | | — | | | 252.4 | | | — | | | | | — | | | — | | | 252.4 | |
| VIE activity | — | | | — | | | — | | | — | | | — | | | | | — | | | (7.4) | | | (7.4) | |
| Other comprehensive income (loss), net of tax of ($5.9) | — | | | — | | | — | | | — | | | (3.0) | | | | | — | | | — | | | (3.0) | |
| Dividends ($0.78 per common share) | — | | | — | | | 0.6 | | | (52.4) | | | — | | | | | — | | | — | | | (51.8) | |
| Stock repurchases for stock award withholding obligations | — | | | — | | | — | | | — | | | — | | | | | (14.1) | | | — | | | (14.1) | |
| Stock compensation on equity-classified awards | — | | | — | | | 27.4 | | | — | | | — | | | | | — | | | — | | | 27.4 | |
| Stock option exercises | — | | | — | | | 3.6 | | | — | | | — | | | | | 36.4 | | | — | | | 40.0 | |
| Distribution of stock awards | — | | | — | | | (17.3) | | | — | | | — | | | | | 17.3 | | | — | | | 0 | |
| Shares issued under employee stock purchase plan | — | | | — | | | 4.2 | | | — | | | — | | | | | 2.9 | | | — | | | 7.1 | |
| Balance as of September 30, 2018 | 88,457,634 | | | 4.4 | | | 602.9 | | | 1,876.2 | | | (113.0) | | | | | (754.3) | | | 0 | | | 1,616.2 | |
| Cumulative effect of ASC 606 adoption, net of tax of $4.8 | — | | | — | | | — | | | (4.9) | | | — | | | | | — | | | — | | | (4.9) | |
| Cumulative effect of ASU 2016-16 adoption, net of tax of $0.2 | — | | | — | | | — | | | (5.6) | | | — | | | | | — | | | — | | | (5.6) | |
| Reclassification due to ASU 2018-02 adoption | — | | | — | | | — | | | 5.4 | | | (5.4) | | | | | — | | | — | | | — | |
| Net income | — | | | — | | | — | | | 152.2 | | | — | | | | | — | | | — | | | 152.2 | |
| Other comprehensive income (loss), net of tax of $7.0 | — | | | — | | | — | | | — | | | (64.1) | | | | | — | | | — | | | (64.1) | |
| Dividends ($0.83 per common share) | — | | | — | | | 0.5 | | | (55.9) | | | — | | | | | — | | | — | | | (55.4) | |
| Stock repurchases for stock award withholding obligations | — | | | — | | | — | | | — | | | — | | | | | (4.7) | | | — | | | (4.7) | |
| Stock repurchases in the open market | — | | | — | | | — | | | — | | | — | | | | | (117.2) | | | — | | | (117.2) | |
| Stock compensation on equity-classified awards | — | | | — | | | 33.9 | | | — | | | — | | | | | — | | | — | | | 33.9 | |
| Stock option exercises | — | | | — | | | 2.6 | | | — | | | — | | | | | 11.9 | | | — | | | 14.5 | |
| Distribution of stock awards | — | | | — | | | (7.7) | | | — | | | — | | | | | 7.7 | | | — | | | 0 | |
| Shares issued under employee stock purchase plan | — | | | — | | | 5.2 | | | — | | | — | | | | | 3.2 | | | — | | | 8.4 | |
| Balance as of September 30, 2019 | 88,457,634 | | | 4.4 | | | 637.4 | | | 1,967.4 | | | (182.5) | | | | | (853.4) | | | 0 | | | 1,573.3 | |
| Net income | — | | | — | | | — | | | 223.0 | | | — | | | | | — | | | — | | | 223.0 | |
| Other comprehensive income (loss), net of tax benefit of $9.6 | — | | | — | | | — | | | — | | | 2.3 | | | | | — | | | — | | | 2.3 | |
| Dividends ($0.87 per common share) | — | | | — | | | 0.5 | | | (58.5) | | | — | | | | | — | | | — | | | (58.0) | |
| Stock repurchases for stock award withholding obligations | — | | | — | | | — | | | — | | | — | | | | | (16.5) | | | — | | | (16.5) | |
| Stock repurchases in the open market | — | | | — | | | — | | | — | | | — | | | | | (54.1) | | | — | | | (54.1) | |
| Stock compensation on equity-classified awards | — | | | — | | | 37.8 | | | — | | | — | | | | | — | | | — | | | 37.8 | |
| Stock option exercises | — | | | — | | | 2.9 | | | — | | | — | | | | | 5.7 | | | — | | | 8.6 | |
| Distribution of stock awards | — | | | — | | | (17.1) | | | — | | | — | | | | | 17.1 | | | — | | | 0 | |
| Shares issued under employee stock purchase plan | — | | | — | | | 5.5 | | | — | | | — | | | | | 3.9 | | | — | | | 9.4 | |
| Other | — | | | — | | | — | | | 0.3 | | | — | | | | | — | | | — | | | 0.3 | |
| Balance as of September 30, 2020 | 88,457,634 | | | $ | 4.4 | | | $ | 667.0 | | | $ | 2,132.2 | | | $ | (180.2) | | | | | $ | (897.3) | | | $ | 0 | | | $ | 1,726.1 | |
See Notes to Consolidated Financial Statements.
Statements
Hill-Rom Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Note 1. Summary of Significant Accounting Policies
Nature of Operations
Hill-Rom Holdings, Inc. (the "Company," "Hill-Rom," "we," "us,"“Company,” “Hillrom,” “we,” “us,” or "our"“our”) was incorporated on August 7, 1969, in the State of Indiana and is headquartered in Chicago, Illinois. We are a leading global medical technology company with more thanleader whose approximately 10,000 employees worldwide. We partner with health care providers in more than 100 countries, across all care settings, by focusing on patient care solutions that improve clinical and economic outcomes in five core areas: Advancing Mobility, Wound Care and Prevention, Patient Monitoring and Diagnostics, Surgical Safety and Efficiency and Respiratory Health. We have three reportable segments, each of which is generally aligned by region and/or product type. Around the world, Hill-Rom's people, products, and programs work towards one mission: Enhancinga single purpose: enhancing outcomes for patients and their caregivers.caregivers by Advancing Connected Care™. Around the world, our innovations touch over 7 million patients each day. Our products and services help enable earlier diagnosis and treatment, optimize surgical efficiency and accelerate patient recovery while simplifying clinical communication and shifting care closer to home. We make these outcomes possible through digital and connected care solutions and collaboration tools, including smart bed systems, patient monitoring and diagnostic technologies, respiratory health devices, advanced equipment for the surgical space and more, delivering actionable, real-time insights at the point of care.
Basis of Presentation and Principles of Consolidation
The Consolidated Financial Statements include the accounts of Hill-RomHillrom and its wholly-owned subsidiaries. In addition, we also consolidate variable interest entities ("VIEs") where Hill-Rom is deemed to have a controlling financial interest. Intercompany accounts and transactions have been eliminated in consolidation, including the intercompany transactions with consolidated VIEs.consolidation. Where our ownership interest is less than 100%, the noncontrolling interests are reported in our Consolidated Financial Statements. Certain prior year amounts have been reclassified to conform to the current year presentation.
Prior Period Reclassification
Beginning in fiscal year 2020, we are presenting Acquisition-related intangible asset amortization as a separate line item on our Statements of Consolidated Income for all periods presented. Acquisition-related intangible asset amortization was previously included in Selling and administrative expenses. Additionally, we will no longer present Gross Profit as a subtotal on our Statements of Consolidated Income.
The following table presents Acquisition-related intangible asset amortization and Selling and administrative expenses, excluding the Acquisition-related intangible asset amortization, for the fiscal years ended September 30, 2019 and 2018.
| | | | | | | | | | | |
| Year Ended September 30 |
| 2019 | | 2018 |
| Selling and administrative expense, previously reported | $ | 941.0 | | | $ | 891.6 | |
| Less: Acquisition-related intangible asset amortization | (122.4) | | | (106.9) | |
| Selling and administrative expense, currently reported | $ | 818.6 | | | $ | 784.7 | |
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of AmericaGAAP requires our management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense duringin the reporting period. Actual results could differ from those estimates. Examples of such estimates include, but are not limited to, our allowance for doubtful accounts receivable, inventory reserves, (Note 1), accrued warranties, (Note 1), the impairment of intangiblesintangible assets and goodwill, (Note 3), use of the spot yield curve approach for pension expense, (Note 6), income taxes (Notes 1 and 9) and commitments and contingencies (Note 13), among others.contingencies. See below for more information.
Government Programs Related to COVID-19
On March 25, 2020, the U.S. government approved the Coronavirus Aid, Relief and Economic Security (“CARES”) Act to provide economic stimulus to address the impact of the pandemic. The governments in certain other non-U.S. countries have also approved legislation in their jurisdictions to address the impact of the pandemic. We evaluated our eligibility and assessed the conditions and requirements of participation in many programs. For the programs in which we elected to participate, we recognized $3.2 million in government grants and cost abatements associated with state aid within the Statement of Consolidated Income for the fiscal year ended September 30, 2020. In addition, we deferred the payment of the employer share of the U.S. Federal Insurance Contributions Act (“FICA”) tax payments totaling $13.8 million in accordance with the CARES Act within the Consolidated Balance Sheet as of September 30, 2020. We continue to evaluate what impact, if any, the CARES Act, or any similar legislation in other non-U.S. jurisdictions, may have on our results of operations.
Cash and Cash Equivalents
We consider investments in marketable securities and other highly liquid instruments with a maturity of three months or less at date of purchase to be cash equivalents. All of our marketable securities may be freely traded.
Restricted Cash
Restricted cash represents funds that are restricted to satisfy designated current liabilities. As of September 30, 2019, restricted cash consisted of amounts held in a trust account to redeem all of our previously outstanding senior unsecured 5.75% notes due September 2023. The restricted cash was used to redeem these senior notes on October 7, 2019. See Note 5. Financing Agreements for additional information.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest, unless the transaction is an installment sale with extended payment terms. ReservesAllowances for uncollectibledoubtful accounts are recorded as a component of Selling and administrative expenses and represent our best estimate of the amount of probable credit losses and collection risk in our existing accounts receivable. We determine such reserves based on historical write-off experience by industry and reimbursement platform. Receivables are generally reviewed on a pooled basisfor collectability based on historical collection experience for each reimbursementreceivable type and receivable type. Receivables for sales transactions are also reviewed individually for collectability. Account balances are charged against the allowance when we believe it is probable the receivable will not be recovered. We do not have any off-balance sheet credit exposure related to our customers. If circumstances change, such as higher than expected claims denials, payment defaults, changes in our business composition or processes, adverse changes in general economic conditions, unfavorable impacts of austerity measures initiated by some governmental authorities, instability or disruption of credit markets, or an unexpected material adverse change in a major customer’s or payer’s ability to meet its obligations, our estimates of the realizability of trade receivables could be reduced by a material amount.
Within rental revenue, the domestic third-party payers’ reimbursement process requires extensive documentation, which has had the effect of slowing both the billing and cash collection cycles relative to the rest of the business, and therefore, increasing total accounts receivable. Because of the extensive documentation required and the requirement to settle a claim with the primary payer prior to billing the secondary and/or patient portion of the claim, the collection period for a claim in a portion of our business may, in some cases, be extended.
We generally hold our trade accounts receivable until they are paid. Certain long-term receivables are occasionally sold to third parties; however, any recognized gain or loss on such sales has historically not been material.
Inventories
Inventories are valued at the lower of cost or market. Inventory costs are determined by the last-in, first-out ("LIFO"(“LIFO”) method for approximately 21%16% and 26%30% of our inventories atas of September 30, 20172020 and 2016.September 30, 2019. Costs for other inventories have been determined principally by the first-in, first-out ("FIFO"(“FIFO”) method. Inventories consist of the following:
|
| | | | | | | | |
| | | September 30 |
| | | 2017 | | 2016 |
| Finished products | | $ | 147.5 |
| | $ | 124.2 |
|
| Work in process | | 38.8 |
| | 35.7 |
|
| Raw materials | | 98.2 |
| | 92.1 |
|
| Total | | $ | 284.5 |
|
| $ | 252.0 |
|
If the FIFO method of inventory accounting which approximates current cost, had been used for all inventories, they would have been approximately $2.0$5.5 million and $2.1$0.3 million higher than reported atas of September 30, 20172020 and 2016.September 30, 2019. Inventories consist of the following:
| | | | | | | | | | | |
| Year Ended September 30 |
| | 2020 | | 2019 |
| Inventories, net of reserves: | | | |
| Finished products | $ | 167.6 | | | $ | 120.5 | |
| Work in process | 48.4 | | | 42.4 | |
| Raw materials | 136.0 | | | 106.7 | |
| Total inventories, net of reserves | $ | 352.0 | | | $ | 269.6 | |
We record reserves when the facts and circumstances indicate that particular inventories will not be sold at prices in excess of current carrying costs. These estimates are based on historical experience and expected future trends.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost and depreciated over the estimated useful life of the assets using principally the straight-line method. Ranges of estimated useful lives are as follows:
|
| | | | |
| Useful Life |
| Land improvements | 6 - 15 years |
| Buildings and building equipment | 10 - 40 years |
| Machinery and equipment | 3 - 10 years |
| Equipment leased to others | 2 -10- 10 years |
When property, plant and equipment is retired from service or otherwise disposed of, the cost and related amount of depreciation or amortization areis eliminated from the asset and accumulated depreciation accounts. The difference, if any, between the net asset value and the proceeds on sale are charged or credited to income.
Total depreciation expense forin fiscal years 2017, 2016ended September 30, 2020, 2019 and 20152018 was $82.0$60.6 million, $86.2$62.1 million and $73.6 million, respectively.$78.6 million. The major components of property, plant and equipment and the related accumulated depreciation were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2020 | | 2019 |
| | Cost | | Accumulated
Depreciation | | Cost | | Accumulated
Depreciation |
| Land and land improvements | | $ | 16.9 | | | $ | 4.4 | | | $ | 16.7 | | | $ | 3.9 | |
| Buildings and building equipment | | 208.2 | | | 95.4 | | | 199.7 | | | 91.1 | |
| Machinery and equipment | | 416.3 | | | 303.4 | | | 397.0 | | | 285.2 | |
| Equipment leased to others | | 216.8 | | | 148.9 | | | 216.2 | | | 152.6 | |
| Total | | $ | 858.2 | | | $ | 552.1 | | | $ | 829.6 | | | $ | 532.8 | |
|
| | | | | | | | | | | | | | | | |
| | | September 30 |
| | | 2017 | | 2016 |
| | | Cost | | Accumulated Depreciation | | Cost | | Accumulated Depreciation |
| Land and land improvements | | $ | 18.4 |
| | $ | 3.3 |
| | $ | 21.5 |
| | $ | 3.1 |
|
| Buildings and building equipment | | 196.1 |
| | 84.7 |
| | 186.9 |
| | 91.9 |
|
| Machinery and equipment | | 402.6 |
| | 265.1 |
| | 380.6 |
| | 239.2 |
|
| Equipment leased to others | | 362.5 |
| | 271.1 |
| | 372.8 |
| | 277.6 |
|
| Total | | $ | 979.6 |
|
| $ | 624.2 |
|
| $ | 961.8 |
|
| $ | 611.8 |
|
Goodwill
Intangible Assets
Intangible assets are stated at cost and consist predominantlyGoodwill represents the excess of goodwill, software, patents, acquired technology, trademarks, and acquired customer relationship assets. With the exception of goodwill and certain trademarks, our intangible assets are amortized on a straight-line basispurchase price paid over periods generally ranging from 1 to 20 years.
We assess the carryingestimated fair value of goodwillthe net assets acquired and non-amortizable intangiblesliabilities assumed in the acquisition of a business. Goodwill is not amortized, but is tested for impairment at least annually duringor on an interim basis if an event occurs or circumstances change that would more likely than not reduce the third quarter of each fiscal year, or more often if events or changes in circumstances indicate there may be impairment.
The majority of our goodwill and many of our intangible assets are not deductible for income tax purposes. A summary of intangible assets and the related accumulated amortization and impairment losses follows:
|
| | | | | | | | | | | | | | | | |
| | | September 30 |
| | | 2017 | | 2016 |
| | | Cost | | Amortization and Impairment | | Cost | | Amortization and Impairment |
| Goodwill | | $ | 2,232.4 |
| | $ | 472.8 |
| | $ | 2,057.2 |
| | $ | 472.8 |
|
| Software | | 166.1 |
| | 133.0 |
| | 174.1 |
| | 140.0 |
|
| Patents and Trademarks | | 504.2 |
| | 16.4 |
| | 497.1 |
| | 19.2 |
|
| Other | | 966.0 |
| | 342.9 |
| | 870.4 |
| | 239.1 |
|
| Total | | $ | 3,868.7 |
|
| $ | 965.1 |
|
| $ | 3,598.8 |
|
| $ | 871.1 |
|
Amortization expense for fiscal years 2017, 2016 and 2015 was $128.8 million, $122.8 million and $44.6 million, respectively. As further discussed in Note 3 of our Consolidated Financial Statements, we have various indefinite-lived intangible assets representing trade names with a carryingfair value of $466.9 million at September 30, 2017a reporting unit below its carrying value. See Note 4. Goodwill and September 30, 2016. Amortization expenseIntangible Assets for all other intangibles is expected to approximate the following for each of the next five fiscal years and thereafter:additional information.
|
| | | |
| | Amount |
| 2018 | $ | 119.5 |
|
| 2019 | $ | 109.7 |
|
| 2020 | $ | 98.0 |
|
| 2021 | $ | 89.0 |
|
| 2022 | $ | 76.1 |
|
| 2023 and beyond | $ | 184.8 |
|
Software consists mainly of capitalized costs associated with internal use software, including applicable costs associated with the implementation/upgrade of our Enterprise Resource Planning systems. In addition, software includes capitalized development costs for software products to be sold. Capitalized software costs are amortized on a straight-line basis over periods ranging from three to ten years. Software amortization expense approximated $12.8 million, $17.0 million and $9.8 million for fiscal years 2017, 2016 and 2015 and is included in the total intangibles amortization presented earlier.
Other includes mainly customer relationships and developed technology at Welch Allyn and Mortara. The cost and amortization amounts of customer relationships at Welch Allyn were $517.4 million and $125.5 million as of September 30, 2017 and $514.1 million and $62.1 million as of September 30, 2016. The cost and amortization amounts of developed technology at Welch Allyn were $54.0 million and $16.6 million as of September 30, 2017 and $54.0 million and $8.6 million as of September 30, 2016. The cost and amortization amounts of customer relationships at Mortara were $52.3 million and $4.6 million as of September 30, 2017. The cost and amortization amounts of developed technology at Mortara were $37.9 million and $2.9 million as of September 30, 2017.
Fair Value Measurements
Fair value measurements are classified and disclosed in one of the following three categories:
•Level 1: Financial instruments with unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities.
•Level 2: Financial instruments with observable inputs other than those included in Level 1 such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3: Financial instruments with unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Unobservable inputs reflect our own assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). Unobservable inputs shall be developed based on the best information available in the circumstances, which might include our own data.
We record cash and cash equivalents, as disclosed on our Consolidated Balance Sheets, as Level 1 instruments and certain other investments and derivatives as either Level 2 or 3 instruments.instruments as they are not actively quoted. Except for the adoption of revised disclosure guidance related to investments held by our pension plan as discussed in Note 6,8. Retirement and Postretirement Benefit Plans, there have been no significant changes in our classification among assets and liabilities. Refer to Note 4 of our Consolidated Financial Statements5. Financing Agreements for disclosure of our debt instrument fair values.
Warranties and Guarantees
We routinely grant limited warranties on our products with respect to defects in material and workmanship. The terms of these warranties are generally one year; however, certain components and products have substantially longer warranty periods. We recognize a reserve with respect to these obligations at the time of product sale, with subsequent warranty claims recorded directly against the reserve. The amount of the warranty reserve is determined based on historical trend experience for the covered products. For more significant warranty-related matters, which might require a broad-based correction,field corrective action, separate reserves are established when such events are identified and the cost of correction can be reasonably estimated.
A reconciliation of changes in our warranty reserve is as follows:
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Balance at October 1 | | $ | 27.5 |
| | $ | 32.1 |
| | $ | 28.4 |
|
| Provision for warranties during the period | | 13.9 |
| | 13.9 |
| | 14.7 |
|
| Warranty reserves acquired | | 1.5 |
| | 2.6 |
| | 7.1 |
|
| Warranty claims incurred during the period | | (17.4 | ) | | (21.1 | ) | | (18.1 | ) |
| Balance at September 30 | | $ | 25.5 |
|
| $ | 27.5 |
|
| $ | 32.1 |
|
In the normal course of business, we enter into various other guarantees and indemnities in our relationships with suppliers, service providers, customers, business partners and others. Examples of these arrangements would include guarantees of product performance, indemnifications to service providers and indemnifications of our actions to business partners. These guarantees and indemnifications have not historically nor do we expect them to havehad a material impact on our financial condition or results of operations, nor do we expect them to although indemnifications associated with our actions generally have no dollar limitations.
In conjunction with our acquisition and divestiture activities, we have entered into select guarantees and indemnifications of performance with respect to the fulfillment of our commitments under applicable purchase and sale agreements. The arrangements generally indemnify the buyer or seller for damages associated with breach of contract, inaccuracies in representations and warranties surviving the closing date and satisfaction of liabilities and commitments retained under the applicable contract. With respect to sale transactions,divestitures, we also routinely enter into non-competition agreements for varying periods of time. Guarantees and indemnifications with respect to acquisition and divestiture activities, if triggered, could have a materiallyan adverse impact on our financial condition and resultsConsolidated Financial Statements.
A rollforward of operations.changes in our warranty reserve is as follows:
| | | | | | | | | | | | | | |
| | Year Ended September 30 |
| | | 2020 | | 2019 |
| Balance at the beginning of the period | | $ | 29.7 | | | $ | 20.5 | |
| Provision for warranties in the period | | 18.6 | | | 23.0 | |
| Warranty reserves acquired | | 0 | | | 0.2 | |
Warranty reserves assumed 1 | | — | | | 2.8 | |
| Warranty claims incurred in the period | | (17.5) | | | (16.8) | |
| Balance at the end of the period | | $ | 30.8 | | | $ | 29.7 | |
1 As a result of the asset acquisition in our Front Line Care segment discussed in Note 3. Business Combinations.
Accrued Rebates
We provide rebates and sales incentives to certain customer groups and distributors. Provisions for rebates are recorded as a reduction in net revenue when revenue is recognized. In some cases, rebates may be payable directly to the customer or distributor. We also have arrangements where we provide rebates to certain distributors that sell to end-user customers at prices determined under a contract between us and the end-user customer. Provisions for rebates are recorded as a reduction in net revenue when revenue is recognized.
Retirement Plans
We sponsor retirement and postretirement benefit plans covering selectcertain employees. Expense recognized in relation to these defined benefit retirement plans and postretirement health care plans in the U.S. is based upon actuarial valuations and inherent in those valuations are key assumptions including discount and mortality rates, and where applicable, expected returns on assets, projected future salary rates and projected health care cost trends. The discount rates used in the valuation of our defined benefit pension and postretirement plans are evaluated annually based on current market conditions. In setting these rates we utilize long-term bond indices and yield curves as a preliminary indication of interest rate movements, and then make adjustments to the respective indices to reflect differences in the terms of the bonds covered under the indices in comparison to the projected outflow of our obligations. Our overall expected long-term rate of return on pension assets is based on historical and expected
future returns, which are inflation adjusted and weighted for the expected return for each component of the investment portfolio. Our rate of assumed compensation increase is also based on our specific historical trends of wage adjustments.
We account for our defined benefit pension and other postretirement plans by recognizing the funded status of a benefit plan in the statement of financial position.balance sheet. We also recognize in accumulatedAccumulated other comprehensive income (loss) certain gains and losses that arose duringin the period. See Note 6 of our Consolidated Financial Statements8. Retirement and Postretirement Benefit Plans for key assumptions and further discussion related to our pension and postretirement plans.
Environmental Liabilities
Expenditures that relate to an existing environmental condition caused by past operations, and which do not contribute to future revenue generation, are expensed. A reserve is established when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These reserves are determined without consideration of possible loss recoveries from third parties.
Specific costs included in environmental expense and reserves include site assessment, development of a remediation plan, clean-up costs, post-remediation expenditures, monitoring, fines, penalties and legal fees. Reserve amounts represent the expected undiscounted future cash outflows associated with such plans and actions.
Self Insurance
We are involvedgenerally self-insured up to certain stop-loss limits for certain employee health benefits, including medical, drug and dental. Our policy is to estimate reserves based upon several factors including known claims, estimated incurred but not reported claims and outside actuarial analysis, which are based on historical information along with certain assumptions about future events. Such estimated reserves are classified as Other current liabilities and Other long-term liabilities in various claims, including product and general liability, workers’ compensation, auto liability and employment related matters.the Consolidated Balance Sheets. Refer to Note 13 of our Consolidated Financial Statements 16. Commitments and Contingenciesfor additional information.
Treasury Stock
Treasury stock consists of our common shares that have been issued, but subsequently reacquired. We account for treasury stock purchases under the cost method. When these shares are reissued, we use an average-cost method to determine cost. Proceeds in excessThe difference between proceeds and the cost basis of cost are creditedthe treasury stock is recorded to additionalAdditional paid-in capital.
Revenue Recognition — Sales and Rentals
Revenue is presented in the Consolidated Statements of Consolidated Income net of sales discounts and allowances, GPO fees, price concessions, rebates and customer returns for productproducts sales and rental revenue reserves. services.
Disaggregation of Revenue
The Company disaggregates revenue recognized from contracts with customers by geography and reportable segments consistent with the way in which management operates and views the business. See Note 14. Segment Reporting for the presentation of the Company's revenue disaggregation.
Performance Obligations & Transaction Price Determination
Revenue is evaluated underrecognized as performance obligations are satisfied, either at a point in time or over time, driven by the following criteria and recognized when each is met:
Evidence of an arrangement: An agreement with the customer reflecting the terms and conditions to deliver products or services serves as evidence of an arrangement.
Delivery: For products, delivery is generally considered to occur upon transfer of title and risk of loss per the respective sales terms. For rental services, delivery is considered to occur when the services are rendered.
Fixed or determinable price: The sales price is considered fixed or determinable if it is not subject to refund or measurable adjustment.
Collection is deemed probable: At or prior to the time of a transaction, credit reviews of each customer are performed to determine the creditworthinessnature of the customer. Collectionperformance obligation that is deemed probable if the customer is expectedcontracted to be ableprovided to pay amounts under the arrangement as those amounts become due. If collectionour customers. A performance obligation is not probable, revenue is recognized when collection becomes probable, generally upon cash collection.
As a general interpretation of the above guidelines, revenue for health care and surgical products are generally recognized upon delivery of the productspromise in a contract to transfer a distinct good or service to the customer, and their assumptionis the unit of riskaccount in the contract. Revenue is measured as the amount of lossconsideration we expect to receive in exchange for satisfying the performance obligations. Certain of our contracts have multiple performance obligations. A contract’s transaction price is allocated to the distinct performance obligations and other risks and rewardsrecognized as revenue when, or as, each performance obligation is satisfied. We allocate the contract’s transaction price to each performance obligation using our best estimate of ownership. Local business customs andthe standalone selling price of each distinct good or service in the contract.
The majority of our product sales terms specific to certain customers or products can sometimes resultrevenue is recognized at a point in deviations to this normal practice; however, in no case is revenue recognized prior totime, primarily based on the transfer of risk of loss and rewards of ownership.
For non-invasive therapy products and medicaltitle, except in circumstances where we are also required to install the equipment, management services, the majority of product offerings are rental products for which revenue is recognized consistentupon customer acceptance of the installation. Performance obligations involving the provision of services and revenue from rental usage of our products are recognized over the time period specified in the contractual arrangement with the renderingcustomer.
Revenue is presented net of several types of variable consideration including rebates, discounts and use of products. For The Vest ®product revenue is generally recognizedreturns, which are estimated at the time of sale generally using the expected value method, although the most likely amount method is also used for certain types of variable consideration. These estimates take into consideration historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns.
Deferred Contract Costs
Certain costs associated with obtaining or fulfilling a contract with a customer (collectively referred to as “deferred contract costs”) are capitalized until such time as the related performance obligations are completed and the related revenue is recognized. Deferred contract costs are recorded as Other current assets and Other assets.
Costs to obtain a contract are primarily comprised of sales commissions paid upon receipt of authorizationa purchase order for certain products, primarily care communications. Commissions are expensed commensurate with the timing of revenue recognition, which is generally 12 to 36 months.
Costs to fulfill a contract includes equipment, installation and other costs directly related to certain performance obligations not completed. These costs primarily relate to our care communications products and other construction projects that require installation or ongoing service maintenance. These costs are expensed commensurate with the timing of revenue recognition, which is generally 12 to 24 months.
The following table summarizes deferred contract cost activity for the fiscal year ended September 30, 2020:
| | | | | | | | | | | | | | | | | |
| September 30, 2020 | | |
| Ending Balance | | Amortization | | Statement of Consolidated Income Classification |
| Costs to obtain a contract | | | | | |
| Other current assets | $ | 6.7 | | | $ | (17.5) | | | Selling and administrative expenses |
| Other assets | 1.8 | | | — | | | |
| | | | | |
| Costs to fulfill a contract | | | | | |
| Other current assets | $ | 26.9 | | | $ | (75.2) | | | Cost of goods sold |
| Other assets | 3.4 | | | — | | | |
Contract Balances
Contract liabilities represent deferred revenues that arise as a result of cash received from customers at inception of contracts or where the timing of billing fromfor services precedes satisfaction of our performance obligations. Such remaining performance obligations represent the applicable paying entity as this serves as evidenceportion of the arrangementcontract price for which work has not been performed and sets a fixed or determinable price.are primarily related to our installation and service contracts. These contract liabilities are recorded in Deferred revenue and Other long-term liabilities. We expect to satisfy the majority of the remaining performance obligations and recognize revenue related to installation and service contracts within 12 to 24 months.
For health careThe nature of our products and services aimed at improving operational efficiencydoes not give rise to contract assets as we typically do not have instances where a right to payment for goods and asset utilization, various revenue recognition techniques are used, dependingservices already transferred to a customer exists that is conditional on something other than the offering. Arrangements to provide services, routinely under separately sold service and maintenance contracts, result in the deferralpassage of revenue until specified services are performed. Service contract revenue is generally
time.
recognized ratably overThe following table summarizes contract liability activity for the fiscal year ended September 30, 2020. The contract period, if applicable, or as services are rendered. Product-related goods are generally recognized upon deliveryliability balance represents the transaction price allocated to the customer.remaining performance obligations.
| | | | | | | | |
| | Contract Liabilities |
| Balance as of September 30, 2019 | | $ | 125.8 | |
| Deferred revenue acquired | | 2.9 | |
| New revenue deferrals | | 300.7 | |
| Revenue recognized upon satisfaction of performance obligations | | (291.3) | |
| Balance as of September 30, 2020 | | $ | 138.1 | |
For product sales, we record reserves resulting in
Accounting & Practical Expedient Elections
We account for shipping and handling activities as fulfillment costs within Cost of goods sold. These activities are not considered to be a reduction of revenue for contractual discounts, as well as price concessions and product returns. Likewise, rental revenue reserves, reflecting contractual and other routine billing adjustments, are recorded as a reduction of revenue. Reserves for revenue are estimated based upon historical rates for revenue adjustments.
Taxes Collected from Customers and Remitted to Governmental Units
separate performance obligation. Taxes assessed by a governmental authority that are directly imposed on a revenue producing transaction between us and our customers, including but not limited to sales taxes, use taxes and value added taxes, are accounted for on a net (excludedexcluded from revenue and cost) basis.cost.
We adopted the significant financing practical expedient under which the impacts of financing are considered immaterial if the duration of the financing is one year or less. Customer payments are due at various times up to 90 days from the date of invoice, though in some countries and for certain customer types, credit terms are longer based on local industry standard.
Cost of Net Revenue
Cost of goods sold for product sales consists primarily of purchased material costs, fixed manufacturing expense, variable direct labor, overhead costs and costs associated with the distribution and delivery of products to our customers. Rental expenses consist of costs associated directly with rental revenue, including depreciation, maintenance, logistics and service center facility and personnel costs.
Research and Development Costs
Research and development costs relate primarily to internal costs for salaries and direct overhead expenses as well as the cost of outside vendors to conduct R&D activities. These costs are expensed as incurred. Costs were $133.7 million, $133.5 million and $91.8 million for fiscal years 2017, 2016 and 2015.
In addition, certain costs for software development technology held for sale are capitalized as intangibles when technological feasibility in the software is established and are amortized over a period of three years to five years once the software is ready for its intended use. The amountamounts capitalized duringin fiscal years 2017, 20162020, 2019 and 2015 was2018 were approximately $2.3$15.3 million, $2.4$8.0 million and $2.6$2.4 million.
Advertising Costs
Advertising costs are expensed as incurred. Costs were $13.8 million, $10.4 million and $6.8 million for fiscal years 2017, 2016 and 2015.
Comprehensive Income
We include the net-of-taxafter-tax effect of unrealized gains or losses on our available-for-sale securities, interest and foreign currency hedges, foreign currency translation adjustments and pension or other defined benefit postretirement plans’ actuarial gains or losses and prior service costs or credits in Accumulated other comprehensive income.income (loss). See Note 5 9. Other Comprehensive Incomeof our Consolidated Financial Statements for further details.
Foreign Currency Translation
The functional currency of foreign operations is generally the local currency in the country of domicile. Assets and liabilities of foreign operations are primarily translated into U.S. dollars at year-end rates of exchange and the income statements are translated at the average rates of exchange prevailing duringin the year. Adjustments resulting from translation of the financial statements of foreign operations into U.S. dollars are excluded from the determination of net income, but included as a component of accumulatedAccumulated other comprehensive income (loss). Foreign currency gains and losses resulting from foreign currency transactions are included in our results of operations and are not material. Foreign currency movements on items designated as net investment hedges were recorded in Accumulated other comprehensive income (loss).
Stock-Based Compensation
We account for stock-based compensation under fair value provisions. Stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. We estimate forfeitures on stock-based compensation, which are based on historical and expected forfeiture rates. In order to determine the fair value of stock options andon the date of grant, we utilize a Binomial model. In order to determine the fair value of other performance-based stock awards on the date of grant, we utilize a BinomialMonte Carlo model. Inherent in this modelthese models are assumptions related to a volatility factor, expected life, risk-free interest rate, dividend yield and expected forfeitures. The risk-free interest rate is based on factual data derived from public sources. The volatility factor, expected life, dividend yield and expected forfeiture assumptions require judgment utilizing historical information, peer data and future expectations. Deferred stock (also known as restrictedRestricted stock units ("RSUs")(“RSUs”) isare measured based on the fair market price of our common stock on the date of grant, as reported by the New York Stock Exchange, multiplied by the number of units granted. See Note 7 of our Consolidated Financial Statements13. Common Stock for further details.
Income Taxes
Hill-RomHillrom and its eligible domestic subsidiaries file a consolidated U.S. income tax return. Foreign operations file income tax returns in a number of jurisdictions. Deferred income taxesWe have a variety of deferred tax assets in numerous tax jurisdictions which are computed using an asset and liability approach to reflect the net tax effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and the corresponding income tax amounts. We have a variety of deferred tax assets in numerous tax jurisdictions. These deferred tax assets are subject to periodic assessment as to recoverability. If it is determined that it is more likely than not that the benefits will not be realized, valuation allowances are recognized. In evaluating whether it is more likely than not that we would recover these deferred tax assets, future taxable income, the reversal of existing temporary differences and tax planning strategies are considered.
As of fiscal year ended September 30, 2017,2020, we had $58.2 million of valuation allowances on deferred tax assets, on a tax-effected basis, primarily related to certain foreign deferred tax attributes that are not expected to be utilized. We believe that our estimates for the valuation allowances recorded against deferred tax assets are appropriate based on current facts and circumstances.
We account for uncertain income tax positions using a threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The difference between the tax benefit recognized in the financial statements for an uncertain income tax position and the tax benefit claimed in the tax return is referred to as an unrecognized tax benefit. See Note 9 of our Consolidated Financial Statements 11. Income Taxesfor further details.
Derivative Instruments and Hedging Activity
We use derivative financial instruments to manage the economic impact of fluctuations in currency exchange and interest rates. Derivative financial instruments related to currency exchange rates include forward purchase and sale agreements whichthat generally have terms no greater than 15 months. Additionally, interest rate swaps and cross-currency interest rate swaps are sometimes used to convert some or all of our long-term debt to either a fixed or variable rate.
Derivative financial instruments are recognized onin the Consolidated Balance Sheets as either assets or liabilities and are measured at fair value. Changes in the fair value of derivatives are recorded each period in the Statement of Consolidated Income or the Statement of Consolidated Comprehensive Income (Loss), depending on whether a derivative is designated and considered effective as part of a hedge transaction, and if it is, the type of hedge transaction. GainsThe Company's derivatives are considered to be highly effective under hedge accounting principles. The Company does not hold or issue derivative financial instruments for speculative purposes. As a result of being effective, gains and losses on derivative instruments reported in accumulatedAccumulated other comprehensive income (loss) are subsequently included in the Statement of Consolidated Income in the periods in which earnings are affected by the hedged item. These activities have not had a material effect on our financial position or results of operationsConsolidated Financial Statements for the periods presented herein.
Dispositions
During the fourth quarter of fiscal 2017, we sold our Völker business. We recorded impairment charges of $25.4 million during the third quarter, relating mainly to non-cash write-downs of long-lived assets and working capital associated with the Völker brand portfolio, and fiscal 2017 transaction related costs of approximately $3.0 million in Special charges. We do not expect a majority of the impairment related to the disposition to be tax deductible.
During the first quarter of fiscal 2017, we sold our Architectural Products business for $4.5 million in cash proceeds and recorded an immaterial gain in Investment income and other, net.
During the fourth quarter of 2016, we sold our perinatal data management system for $10.5 million and recorded a gain of $10.1 million in Investment income and other, net.
All businesses recently disposed were part of our Patient Support Systems segment.
Recently IssuedAdopted Accounting Guidance
In February 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) and subsequently issued related amendments, collectively referred to as “ASC 842”. From the lessee’s perspective, the new standard establishes aThe objective of this guidance is to increase transparency and comparability among organizations through recognizing leased assets, called right-of-use ("ROU"assets (“ROU”) model that requires a lessee to record a ROU asset, and a lease liabilityliabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement forand disclosing key information about leasing arrangements. As a lessee. From the lessor’s perspective,lessee, the new standard requires us to recognize both the ROU assets and lease liabilities in the balance sheet for most leases, whereas under previous GAAP only finance lease liabilities (referred to as capital leases) were recognized in the balance sheet. In addition, for both lessees and lessors, the definition of a lease has been revised, which may result in changes to the classification of an arrangement as a lease. Under the new standard, an arrangement that conveys the right to control the use of an identified asset by obtaining substantially all of its economic benefits and directing how it is used is a lease, whereas the previous definition focused on the ability to control the use of the asset or to obtain its output. Quantitative and qualitative disclosures related to the amount, timing and judgments of an entity’s accounting for leases and the related cash flows are expanded under the new standard. Disclosure requirements apply to both lessees and lessors, whereas previous disclosures related only to lessees. The recognition, measurement, and presentation of revenues, expenses, and cash flows arising from a lease have not significantly changed from previous GAAP.
We adopted ASC 842 effective October 1, 2019 using the optional transition method approach. We elected the package of practical expedients, which applies to both lessees and lessors, to (1) not reassess whether existing contracts contain leases, (2) carryforward the existing lease classification, and (3) not reassess initial direct costs associated with existing leases.
As a lessee, the adoption of the guidance on October 1, 2019 resulted in the recognition of ROU assets of $82.5 million and lease liabilities of $85.8 million, which all related to operating leases. The ROU assets were lower than the lease liabilities due to the derecognition of deferred rent balances of $3.3 million. As a lessor, to classify leases as either sales-type, finance or operating. A lease will be treatedthere was no impact as a sale if it transfers allresult of the risksadoption. We did not recognize any adjustment to the comparative period presented in the financial statements in accordance with our adoption method. The guidance did not have a material impact on our Statements of Consolidated Income.
See Note 7. Leases for additional information on the impacts of ASC 842.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and rewards, as well as controlOther (Topic 350): Simplifying the Test for Goodwill Impairment. This standard eliminates Step 2 of the underlying asset,goodwill impairment test and requires a goodwill impairment to be measured as the lessee. If risks and rewards are conveyed withoutamount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the transfercarrying amount of control, the lease is treated as a financing lease. If the lessor does not convey risks and rewards or control, an operating lease results.its goodwill. ASU 2016-022017-04 is effective for our first quarter of fiscal 2020. A modified retrospective2021 and requires a prospective transition approachmethod. Early adoption is required for leases existing at, or entered into after, the beginning of the earliest comparative period presentedpermitted. We early adopted this standard in the financial statements, with certain practical expedients available. We are currently infirst quarter of fiscal 2020 and the process of evaluating theguidance did not have a material impact of the amended guidance on our Consolidated Financial Statements.
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The purpose of the standard is to allow the use of the OIS rate based on the SOFR for hedge accounting purposes, which allows entities to designate changes in the fair values of fixed-rate financial assets or liabilities attributable to the OIS rate as the hedged risk. The amendment recognizes the OIS rate based on the SOFR as likely London Interbank Offered Rate (“LIBOR”) replacements and supports the marketplace transition by adding the new reference rate as a benchmark rate. We adopted this standard in the first quarter of fiscal 2020. The adoption of this ASU did not impact our financial statements as we have not yet utilized the OIS rate based on the SOFR for borrowings under our lending arrangements or as a benchmark rate for hedge accounting purposes. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The purpose of the standard is to provide guidance for the effects of the marketplace transition from LIBOR to a new reference rate as a benchmark rate. ASU 2020-04 is optional and is effective for a limited period of time from March 12, 2020 through December 31, 2022. We will continue to monitor, assess, and plan for the phase out of LIBOR.
In May 2014, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) 2014-09, "RevenueRevenue from Contracts with Customers"(“ASC 606”), which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 which delayed the effective date ofWe adopted the new revenue guidance by one year, while permitting companies to early adopt the new standard as of the original effective date. As a result, the provisions of ASU 2014-09 and subsequent amendments, are effective for us in the first quarter of fiscal 2019 using eitherthe modified retrospective approach. The cumulative effect of initially applying ASC 606 was an adjustment to decrease the opening Retained earnings by $4.9 million, which is net of a $4.8 million tax effect, as of October 1, 2018.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments (Topic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities. This standard requires equity securities to be measured at fair value with changes in fair value recognized through net income and eliminated the cost method for equity securities without readily determinable fair values. In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This standard issued six technical corrections and improvements to clarify guidance in ASU 2016-01, which primarily impacted the accounting for equity investments, financial liabilities under fair value option, and the presentation and disclosure requirements of financial instruments. We adopted ASU 2016-01 and ASU 2018-03 prospectively in the first quarter of fiscal 2019 and the new updates did not have a material impact on our Consolidated Financial Statements. We applied the practicability election within this standard under which our investments in equities that are not recorded under the consolidation or equity method of accounting guidance are valued at cost, less impairment, plus or minus observable price changes (in orderly transactions) of an identical or similar investment of the following transition methods: (i)same issuer.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The purpose of the standard is to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The standard addresses specific issues including debt prepayment and extinguishment costs, settlement of zero-coupon debt, contingent consideration payments made after a full retrospective approach reflectingbusiness combination, proceeds from the settlement of insurance claims and certain life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and the application of the predominance principle in separately identifiable cash flows. We adopted ASU 2016-15 in the first quarter of fiscal 2019 using a retrospective transition method and elected to continue to use the nature of distribution approach for distributions received from equity method investees. The impact of the adoption of ASU 2016-15 did not have a material impact on our Consolidated Financial Statements.
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (Topic 740). This standard requires immediate recognition of the income tax consequences of intercompany asset transfers other than inventory. We adopted ASU 2016-16 in each prior reporting period with the option to elect certain practical expedients, or (ii) afirst quarter of fiscal 2019 using the modified retrospective approach with thea cumulative effect adjustment directly to retained earnings. The cumulative effect of initially adoptingapplying ASU 2014-09 recognized2016-16 was an adjustment to decrease prepaid taxes by $5.8 million and increase deferred tax assets by $0.2 million with a corresponding decrease to the opening balance of Retained earnings of $5.6 million.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This standard requires that companies include amounts generally described as restricted cash and restricted cash equivalents, along with cash and cash equivalents, when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. We retrospectively adopted ASU 2016-18 in the first quarter of fiscal 2019, resulting in no change to our historical Statements of Consolidated Cash Flows. We have included restricted cash with cash and cash equivalents accordingly in our Statement of Consolidated Cash Flows for the fiscal year ended September 30, 2019.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This standard provides clarification on the definition of a business and provides guidance on whether transactions should be recorded as acquisitions (or disposals) of assets or businesses. We adopted ASU 2017-01 in the first quarter of fiscal 2019. ASU 2017-01 did not have a material impact on our Consolidated Financial Statements.
In February 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This standard requires employers to include only the service cost component of net periodic pension cost in operating expenses, together with other employee compensation costs. The other components of net periodic pension cost, including interest cost, expected return on plan assets, amortization of prior service cost and settlement and curtailment effects, are to be included in non-operating expenses. The amendment allows a practical expedient that permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. We adopted ASU 2017-07 in the first quarter of fiscal 2019 and applied the practical expedient upon adoption. ASU 2017-07 did not have a material impact on our Consolidated Financial Statements. As a result of the adoption of ASU 2017-07, we reclassified $0.1 million for fiscal 2018 and $1.6 million for fiscal 2017 from Selling and administrative expenses to Investment income (expense) and other, net. See Note 8. Retirement and Postretirement Benefit Plans for additional information on our retirement and postretirement plans.
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220). The standard allows entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax reform to retained earnings. We adopted ASU 2018-02 in the first quarter of fiscal 2019. As a result of the adoption of ASU 2018-02,
we reclassified $5.4 million from Accumulated other comprehensive income (loss) to Retained earnings. We applied the individual item approach for releasing income tax effects from Accumulated other comprehensive income (loss).
Recently Issued Accounting Guidance
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) - Measurement of Credit Losses of Financial Instruments and has subsequently issued related amendments, collectively referred to as“Topic 326”. Topic 326 requires entities to measure credit losses for financial assets measured at amortized cost based on expected losses rather than incurred losses. For available-for-sale debt securities with unrealized losses, entities will be required to recognize credit losses through an allowance for credit losses. Topic 326 is effective for our first quarter of fiscal 2021 and requires a modified retrospective transition method. Early adoption is permitted. We do not expect the dateadoption to have a material impact on our Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The purpose of adoption. We planthe standard is to adoptimprove the overall usefulness of fair value disclosures to financial statement users and reduce unnecessary costs to companies when preparing the disclosures. ASU 2018-13 is effective for our first quarter of fiscal 2021 and requires the application of the prospective method of transition (for only the most recent interim or annual period presented in the initial fiscal year of adoption) to the new standard effective October 1, 2018disclosure requirements for (1) changes in unrealized gains and losses included in other comprehensive income and (2) the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 also requires prospective application to any modifications to disclosures made because of the change to the requirements for the narrative description of measurement uncertainty. The effects of all other amendments made by ASU 2018-13 must be applied retrospectively to all periods presented. Early adoption is permitted. We are continuing to evaluatecurrently in the process of evaluating the impact of adoption on our Consolidated Financial StatementsStatements.
In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Topic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. The purpose of the standard is to improve the overall usefulness of defined benefit pension and other postretirement plan disclosures to financial statement users and reduce unnecessary costs to companies when preparing the disclosures. ASU 2018-14 is effective for our fourth quarter of fiscal 2021 and requires a retrospective transition method. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption on our Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40):Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The update aligns the requirements for capitalizing implementation approachcosts incurred in a hosting arrangement for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for our first quarter of fiscal 2021 and allows a retrospective or a prospective transition method to all implementation costs incurred after the date of adoption. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption on our Consolidated Financial Statements.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. The purpose of the standard is to (1) clarify that transactions between participants in a collaborative agreement should be used.accounted for under Topic 606 and (2) add unit-of-account guidance in Topic 808 to align with Topic 606. ASU 2018-18 is effective for our first quarter of fiscal 2021 and must be applied retrospectively to the first quarter of fiscal 2020, the date of initial application of Topic 606. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption on our Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The purpose of the standard is to remove certain exceptions to the general principles of Topic 740: Income Taxes in order to reduce the cost and complexity of its application and to maintain or improve the usefulness of the information provided to users of financial statements. ASU 2019-12 is effective for our first quarter of fiscal 2022 and will be applied either retrospectively or prospectively depending on the specific Topic 740 exception affected. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption on our Consolidated Financial Statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statementsConsolidated Financial Statements upon adoption.
Note 2. AcquisitionsSupplementary Financial Statement Information
Mortara InstrumentSupplemental Balance Sheet Information
On February 14, 2017,Investments
During the fiscal year ended September 30, 2019, we completed the acquisition of Mortara Instrument, Inc. ("Mortara") for consideration of $330.0 million in cash ($311.2 million, net of cash acquired), primarily financed through a private offering of $300.0acquired $26.6 million of senior unsecured notes (see non-marketable equity securities that are valued at cost.
During the fiscal year ended September 30, 2020, we sold an equity investment with a carrying value of $3.1 million and recognized a loss of $0.3 million and recognized an impairment loss of $1.7 million on a cost method investment. These losses were recorded as a component of Investment income (expense) and other, net.
As of September 30, 2020 and 2019, investments totaling $49.0 million and $51.1 million were recorded as a component of Other assets.
Supplemental Cash Flow Information
| | | | | | | | | | | | | | | | | |
| Year Ended September 30 |
| 2020 | | 2019 | | 2018 |
| Cash paid for income taxes | $ | 88.0 | | | $ | 54.4 | | | $ | 44.8 | |
| Cash paid for interest | 72.4 | | | 91.8 | | | 90.4 | |
| | | | | |
| Non-cash investing activities: | | | | | |
| Change in capital expenditures not paid | $ | 4.9 | | | $ | 8.0 | | | $ | (1.6) | |
| Sale of equity method investment | 2.1 | | | — | | | — | |
| Total non-cash investing activities: | $ | 7.0 | | | $ | 8.0 | | | $ | (1.6) | |
| | | | | |
| Non-cash financing activities: | | | | | |
| Treasury stock issued under stock compensations plans | $ | 26.7 | | | $ | 22.7 | | | $ | 56.6 | |
| Distribution of shares issued under stock-based compensation plans | 30.0 | | | 15.4 | | | 36.2 | |
Note 4 of our Consolidated Financial Statements). Mortara provides3. Business Combinations
Acquisitions
Assets acquired and liabilities assumed in a portfolio of diagnostic cardiology devices designed to serve the full continuum of clinical care, from acute care to primary care and clinical research organizations.
The results of Mortarabusiness combination are included in the Consolidated Financial Statements sincerecorded at their estimated fair values on the date of acquisition. The impact to reported revenuedifference between the purchase price amount and the net income was not significant. The impact to our year to date revenuefair value of assets acquired and net incomeliabilities assumed is recognized as goodwill on an unaudited proforma basis, asthe balance sheet if the Mortarapurchase price exceeds the estimated net fair value or as a bargain purchase gain on the income statement if the purchase price is less than the estimated net fair value. The allocation of the purchase price may be modified up to one year after the acquisition had been consummated at the beginning of our fiscal 2016 year, would not have been significant.
The following summarizes the preliminary estimate ofdate as more information is obtained about the fair value of assets acquired and liabilities assumed at the date of the Mortara acquisition. assumed.
During fiscal 2017,2020 and 2019, we madeacquired the following companies:
| | | | | | | | | | | |
| Fiscal Year | Company Name | Description of the Business | Description of the Acquisition |
| 2020 | Excel Medical | Clinical communications software company located in the United States | Purchased all of the outstanding equity interest. |
| 2020 | Connecta | Clinical communications software company based in Mexico. | Purchased the multiplatform medical device integration and connectivity software programs, products, and solutions of the company. |
| 2020 | Videomed 1 | Developer of integrated video solutions in operating rooms located in Italy. | Purchased all of the outstanding equity interest. |
| 2019 | Voalte | Clinical communications software company located in the United States. | Purchased all of the outstanding equity interest. |
| 2019 | Breathe | Developer and manufacturer of a patented wearable, non-invasive ventilation technology that supports improved patient mobility, which is located in the United States. | Purchased all of the outstanding equity interest. |
1 On July 21, 2020, we acquired the remaining 74% outstanding equity interest in Videomed for total aggregate consideration of $10.7 million. As a result of the transaction, the previously held 26% equity investment was adjusted to reflect the fair value as of the acquisition date and a gain of $3.0 million was recognized in Investment income (expense) and other, net for the fiscal year ended September 30, 2020. The fair value of the previously held equity investment was estimated using the discounted cash flow method of the income approach that incorporated a discount for the lack of marketability. |
The following tables summarize additional details for each acquisition that closed during the fiscal years ended September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| | Company Name |
|
Excel Medical | |
Connecta | | Videomed |
| Acquisition Details: | | | | | |
| Date of acquisition | January 10, 2020 | | May 18, 2020 | | July 21, 2020 |
| | | | | |
| Cash paid | $ | 13.1 | | | $ | 7.5 | | | $ | 7.8 | |
Contingent consideration 1 | 6.1 | | | 0.2 | | | 2.9 | |
Total consideration 2 | $ | 19.2 | | | $ | 7.7 | | | $ | 10.7 | |
| | | | | |
Contingent consideration payable up to: 3 | $ | 15.0 | | | $ | 4.0 | | | $ | 3.7 | |
| | | | | |
| Segment information: | Patient Support
Systems | | Front Line Care | | Surgical Solutions |
| | | | | |
The following summarizes the fair value of assets acquired and liabilities assumed for each fiscal 2020 acquisition: 4 |
| | | | | |
| Trade accounts receivable | $ | 0.6 | | | $ | — | | | $ | 2.5 | |
| Inventories | 0.2 | | | — | | | 0.9 | |
| Other current assets | 0.1 | | | — | | | 0.2 | |
Goodwill 5 | 10.5 | | | 4.8 | | | 10.0 | |
Developed technology 6 | 10.9 | | | 2.9 | | | 4.4 | |
| Other assets | 0.1 | | | — | | | 0.6 | |
| Trade accounts payable | — | | | — | | | (1.2) | |
| Deferred revenue | (2.7) | | | — | | | (0.2) | |
| Other current liabilities | (0.5) | | | — | | | (1.1) | |
| Other long-term liabilities | — | | | — | | | (2.4) | |
| Fair value of assets acquired and liabilities assumed | 19.2 | | | 7.7 | | | 13.7 | |
| Less: Fair value adjustment of previously held investment | — | | | — | | | (3.0) | |
| Total purchase price, net of cash acquired | $ | 19.2 | | | $ | 7.7 | | | $ | 10.7 | |
| | | | | |
| | | | | |
| Acquisition costs for the fiscal year ended September 30, 2020: | | | | | |
| Acquisition and integration costs recognized in Selling and administrative expenses | $ | 2.2 | | | $ | 0.3 | | | $ | 0.4 | |
| | | | | |
1 This amount represents the fair value of the contingent consideration on the acquisition date. For Excel Medical, contingent consideration also includes $1.6 million, which was withheld at the close of the transaction and is payable upon completion of a supply contract modification. As of September 30, 2020, we recognized $1.4 million of acquisition and integration costs for the fair value adjustment of the Excel Medical contingent consideration. The fair value adjustments related to Connecta and Videomed contingent consideration were not significant as of September 30, 2020.
|
2 The purchase price for fiscal 2020 acquisitions are subject to post-closing adjustments. |
3 The contingent consideration will be payable if commercial milestones defined in the sale and purchase agreements are achieved within the specified time period following the date of acquisition. For Excel Medical, Connecta and Videomed, the specified time periods are 2 years, 3.5 years and 2 years, respectively. |
4 The fair values of assets acquired and liabilities assumed are still considered to be preliminary. The values reflect net working capital and fair value adjustments as of the fiscal year ended September 30, 2020. We do not expect further adjustments to be significant. |
5 Goodwill recognized in our acquisitions is attributable to the following: žExcel Medical - Accelerating our leadership in care communications platform and advancing our digital and mobile communications platform and capabilities. žConnecta - Advancing connected care in Mexico as well as creating lower cost opportunities to expand to other emerging markets. žVideomed - Expanding our operating room integration platform and our market leadership in advancing connected care.
Goodwill in connection with the Excel Medical and Connecta acquisitions is deductible for tax purposes in the United States. Goodwill for the Videomed acquisition is not deductible for tax purposes in Italy. |
6 Useful lives for the acquired developed technology intangible assets range from 5 years to 10 years. |
| | | | | | | | | | | |
| | Company Name |
|
Voalte | |
Breathe |
| Acquisition Details: | | | |
| Date of acquisition | April 1, 2019 | | September 3, 2019 |
| Cash paid | $ | 175.8 | | | $ | 127.6 | |
| Contingent consideration | 5.2 | | | — | |
Total consideration 1 | $ | 181.0 | | | $ | 127.6 | |
| | | |
Contingent consideration payable up to: 2 | $ | 15.0 | | | $ | — | |
| | | |
| Segment information: | Patient Support
Systems | | Front Line Care |
| | | |
| The following summarizes the fair value of assets acquired and liabilities assumed for each fiscal 2019 acquisition: |
| | | |
| Trade accounts receivable | $ | 5.8 | | | $ | 0.3 | |
| Inventories | 0.1 | | | 5.7 | |
| Other current assets | 2.7 | | | 0.1 | |
| Property, plant and equipment | 0.2 | | | 2.1 | |
Goodwill 3 | 98.5 | | | 59.8 | |
Non-competition agreements 4 | 2.7 | | | — | |
Trade name 4 | 13.5 | | | 4.0 | |
Customer relationships 4 | 29.0 | | | 0.4 | |
Developed technology 4 | 55.0 | | | 56.0 | |
| Other assets | — | | | 0.2 | |
| Trade accounts payable | (1.7) | | | (0.5) | |
| Deferred revenue | (10.7) | | | — | |
| Other current liabilities | (4.3) | | | (1.6) | |
| Deferred income taxes | (9.8) | | | 1.9 | |
| Other long-term liabilities | — | | | (0.8) | |
| Total purchase price, net of cash acquired | $ | 181.0 | | | $ | 127.6 | |
| | | |
| | | |
| Acquisition costs for the fiscal year ended September 30, 2020: | | | |
Acquisition and integration costs recognized in Selling and administrative expenses 5 | $ | (8.4) | | | $ | 2.5 | |
| Acquisition and integration costs recognized in Special charges | — | | | 3.1 | |
|
| Acquisition costs for the fiscal year ended September 30, 2019: | | | |
Acquisition and integration costs recognized in Selling and administrative expenses 5 | $ | 12.1 | | | $ | 6.4 | |
| Acquisition and integration costs recognized in Special charges | — | | | 1.7 | |
|
1 The purchase price for fiscal 2019 acquisitions are considered final. |
2 Contingent consideration was not paid as the commercial milestones were not met within 1 year of the acquisition date. |
3 Goodwill recognized in our acquisitions is attributable to the following: žVoalte - Enhancing synergies, accelerating our leadership in care communications platform and advancing our digital and mobile communications platform and capabilities. žBreathe - Enhancing synergies and accelerating our leadership in respiratory health products.
Goodwill associated with the acquisitions of Voalte and Breathe is not deductible for tax purposes in the United States. |
4 The intangible asset useful lives for non-competition agreements, trade name, customer relationships and developed technology range from 2 years to 11 years. |
5 Acquisition and integration costs recognized for Voalte during fiscal 2020 and fiscal 2019 include $(8.4) million and $3.2 million related to fair value adjustments to contingent consideration. Hillrom did not pay any contingent consideration as the commercial milestones were not met within 1 year of the acquisition date. |
Asset Acquisition
On October 1, 2018, we acquired the right to use patented technology and certain adjustments to the opening balance sheet as of the acquisition date which were insignificant. The fair value ofrelated assets acquired and liabilities assumed are still considered to be preliminary, however we do not expect further adjustments to be significant.
|
| | | |
| | Amount |
| Trade receivables | $ | 16.4 |
|
| Inventory | 22.1 |
|
| Other current assets | 2.8 |
|
| Property, plant and equipment | 18.2 |
|
| Goodwill | 164.8 |
|
| Trade names (7-year weighted average useful life) | 15.8 |
|
| Customer relationships (8-year useful life) | 37.9 |
|
| Developed technology (7-year useful life) | 52.3 |
|
| Other noncurrent assets | 4.7 |
|
| Current liabilities | (22.5 | ) |
| Noncurrent liabilities | (1.3 | ) |
| Total purchase price, net of cash acquired | $ | 311.2 |
|
Goodwill in connection with the Mortara acquisition was allocated entirelyfrom a supplier to our Front Line Care segment. The preliminary fair value attributes a majorityWe paid $17.1 million of cash and committed to guaranteed minimum future royalty payments of $22.0 million, which are presented in Other intangible assets and software, net and are being amortized over the 7-year term of the goodwill to the acquired U.S. operations which is deductible for tax purposes.agreement.
Tridien MedicalDispositions
On September 21, 2016,August 2, 2019, we acquired allcompleted a disposition to sell certain of the outstanding shares of Tridienour surgical consumable products and related assets for a purchase price of $26.0$166.6 million, which is net of cash acquired. Tridien develops, manufactures and markets support surfacesworking capital adjustments. In fiscal 2019, we recorded a pre-tax loss on this disposition of $15.9 million, including transaction costs of $4.0 million, in Investment income (expense) and patient positioning devices. We fundedother, net. During the fiscal year ended September 30, 2020, we recorded an additional loss of $4.2 million related to this transaction primarily with borrowings underdue to income taxes. This disposition did not have a significant effect on our Senior Secured Revolving Credit Facility ("Revolving Credit Facility"). The fair valueoperations or financial results, and, therefore, has not been reported as a discontinued operation.
In fiscal 2018, we conveyed certain net assets related to our third-party rental business that was part of assets acquired included $10.4 million of working capital consisting primarily of inventories and accounts receivable, $7.4 million of goodwill and $6.3 million of acquisition-related intangible assets. The results of Tridien are included in the Consolidated Financial Statements since the date of acquisition. Goodwill in connection with the Tridien acquisition was allocated entirely to our Patient Support Systems segment, and is not deductiblewhich was comprised of purchased moveable medical equipment that could be rented to customers, to Universal Hospital Services, Inc. (“UHS”) in exchange for tax purposes.
During fiscal 2017,UHS’s agreement to dismiss its previously disclosed litigation against us (“Settlement Agreement”). As a result, we made certain adjustmentsrecorded a loss of $24.5 million in Special charges, which included $20.9 million related to the opening balance sheet as ofnon-cash loss reserve for the acquisition date which were insignificant.
Welch Allyn
On September 8, 2015, we completed the acquisition of Welch Allyn Holdings, Inc.assets conveyed, and its subsidiaries (collectively, "Welch Allyn") for consideration of $1,686.8 million in cash ($1,633.1 million, net of cash acquired) and 8,133,722 shares of Hill-Rom common stock for a total combined purchase priceother Settlement Agreement related costs of approximately $2.1 billion. Welch Allyn is a leading manufacturer of medical diagnostic equipment and offers a diversified portfolio of devices that assess, diagnose, treat, and manage a wide variety of illnesses and diseases.
$3.6 million. The transaction was funded with new borrowings, including $1.8 billionclosed in term loans and $425.0 million of senior notes issued in a private placement debt offering. Refer to Note 4 of our Consolidated Financial Statements for additional information regarding our debt obligations.fiscal 2018.
The following summarizes the fair value of assets acquired and liabilities assumed at the date of the acquisition. These results are considered final.
|
| | | |
| | Amount |
| | |
| Trade receivables | $ | 62.9 |
|
| Inventory | 110.5 |
|
| Other current assets | 53.8 |
|
| Property, plant, and equipment | 91.5 |
|
| Goodwill | 1,179.8 |
|
| Trade name (indefinite life) | 434.0 |
|
| Customer relationships (12-year useful life) | 516.8 |
|
| Developed technology (7-year weighted average useful life) | 54.0 |
|
| Other intangibles | 19.5 |
|
| Other noncurrent assets | 26.5 |
|
| Current liabilities | (166.1 | ) |
| Noncurrent deferred income taxes | (309.0 | ) |
| Other noncurrent liabilities | (24.8 | ) |
| Total purchase price, net of cash acquired | $ | 2,049.4 |
|
| | |
|
| Fair value of common stock issued | $ | 416.3 |
|
| Cash payment, net of cash acquired | 1,633.1 |
|
| Total consideration | $ | 2,049.4 |
|
Final purchase accounting adjustments were made in fiscal 2016 reducing goodwill by $23.7 million primarily due to the finalization of deferred income taxes. These adjustments are reflected in the table above.
Goodwill from the Welch Allyn acquisition, which is not deductible for tax purposes, is primarily due to enhanced customer relevance and a stronger competitive position resulting from the business combination, including a complementary commercial position, product portfolio, and enhanced synergies. The goodwill from the Welch Allyn acquisition has been allocated entirely to our Front Line Care segment.
Our total revenue on an unaudited proforma basis, as if the Welch Allyn acquisition had been consummated at the beginning of our 2014 fiscal year, would have been higher by approximately $638 million for the year ended September 30, 2015. On the same unaudited proforma basis, our net income would have been lower by approximately $59 million for the year ended September 30, 2015. The proforma net income for fiscal 2015 has been adversely impacted by significant costs related to the transaction including deal costs, financing costs, restructuring costs incurred in relation to our synergy initiatives, costs associated with triggering the change-in-control provisions of certain equity-based compensation programs at Welch Allyn, and purchase price accounting, including the nonrecurring effects of the inventory step-up. These results are not indicative of expected future performance.
The unaudited proforma results are based on the Company’s historical financial statements and those of the Welch Allyn business and do not necessarily indicate the results of operations that would have resulted had the acquisition been completed at the beginning of the comparable period presented and are not indicative of the results of operations in future periods.
Note 3.4. Goodwill and Indefinite-Lived Intangible Assets
The following summarizes goodwill activity by reportable segment:Goodwill
|
| | | | | | | | | | | | | | | |
| | Patient Support Systems | | Front Line Care | | Surgical Solutions | | Total |
| Balances at September 30, 2015 | | | | | | | |
| Goodwill | $ | 536.0 |
| | $ | 1,232.2 |
| | $ | 315.1 |
| | $ | 2,083.3 |
|
| Accumulated impairment losses | (472.8 | ) | | — |
| | — |
| | (472.8 | ) |
| Goodwill, net at September 30, 2015 | 63.2 |
| | 1,232.2 |
| | 315.1 |
| | 1,610.5 |
|
| | | | | | | | |
| Changes in Goodwill during the period: | | | | | | | |
| Goodwill related to acquisitions | 7.9 |
| | (23.7 | ) | | 1.1 |
| | (14.7 | ) |
| Currency translation effect | 0.2 |
| | (3.0 | ) | | (8.6 | ) | | (11.4 | ) |
| | | | | | | | |
| Balances at September 30, 2016 |
| |
|
|
| | |
| Goodwill | 544.1 |
| | 1,205.5 |
| | 307.6 |
| | 2,057.2 |
|
| Accumulated impairment losses | (472.8 | ) | | — |
| | — |
| | (472.8 | ) |
| Goodwill, net at September 30, 2016 | 71.3 |
| | 1,205.5 |
| | 307.6 |
| | 1,584.4 |
|
| | | | | | | | |
| Changes in Goodwill during the period: | |
| | |
| | |
| | |
|
| Goodwill related to acquisitions | (0.5 | ) | | 164.8 |
| | — |
| | 164.3 |
|
| Currency translation effect | 1.4 |
| | 5.3 |
| | 4.2 |
| | 10.9 |
|
| | | | | | | | |
| Balances at September 30, 2017 | |
| | |
| | |
| | |
|
| Goodwill | 545.0 |
| | 1,375.6 |
| | 311.8 |
| | 2,232.4 |
|
| Accumulated impairment losses | (472.8 | ) | | — |
| | — |
| | (472.8 | ) |
| Goodwill, net at September 30, 2017 | $ | 72.2 |
| | $ | 1,375.6 |
| | $ | 311.8 |
| | $ | 1,759.6 |
|
We acquired Mortara, Tridien and Welch Allyn during 2017, 2016 and 2015, respectively. All goodwill associated with Mortara and Welch Allyn was assigned to the Front Line Care segment and all goodwill associated Tridien was assigned to the Patient Support Systems segment. During fiscal 2017 and 2016, we recorded adjustments to goodwill related to the Mortara, Tridien, and
Welch Allyn acquisitions. Refer to Note 2 of our Consolidated Financial Statements for additional information regarding these acquisitions.
As discussed in Note 11 of our Consolidated Financial Statements,14. Segment Reporting, we operate in three reportable business segments. Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded and is reallocated as necessary based on the restructuringcomposition of reporting units over time. Once goodwill is assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.
The following summarizes goodwill activity by reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Patient Support Systems | | Front Line Care | | Surgical Solutions | | Total |
| Balances as of September 30, 2018 | | | | | | | |
| Goodwill | $ | 544.4 | | | $ | 1,370.6 | | | $ | 296.1 | | | $ | 2,211.1 | |
| Accumulated impairment losses | (472.8) | | | 0 | | | 0 | | | (472.8) | |
| Goodwill, net as of September 30, 2018 | 71.6 | | | 1,370.6 | | | 296.1 | | | 1,738.3 | |
| | | | | | | |
| Changes in Goodwill in the period: | | | | | | | |
| Goodwill related to acquisitions | 98.4 | | | 60.2 | | | — | | | 158.6 | |
| Goodwill related to disposition | — | | | — | | | (81.7) | | | (81.7) | |
| Currency translation effect | (2.3) | | | (6.1) | | | (5.9) | | | (14.3) | |
| | | | | | | |
| Balances as of September 30, 2019 | | | | | | | |
| Goodwill | 640.5 | | | 1,424.7 | | | 208.5 | | | 2,273.7 | |
| Accumulated impairment losses | (472.8) | | | 0 | | | 0 | | | (472.8) | |
| Goodwill, net as of September 30, 2019 | 167.7 | | | 1,424.7 | | | 208.5 | | | 1,800.9 | |
| | | | | | | |
| Changes in Goodwill in the period: | | | | | | | |
| Goodwill related to acquisitions | 10.6 | | | 4.4 | | | 10.0 | | | 25.0 | |
| Currency translation effect | 2.4 | | | 3.5 | | | 3.7 | | | 9.6 | |
| | | | | | | |
| Balances as of September 30, 2020 | | | | | | | |
| Goodwill | 653.5 | | | 1,432.6 | | | 222.2 | | | 2,308.3 | |
| Accumulated impairment losses | (472.8) | | | 0 | | | 0 | | | (472.8) | |
| Goodwill, net as of September 30, 2020 | $ | 180.7 | | | $ | 1,432.6 | | | $ | 222.2 | | | $ | 1,835.5 | |
Testing for impairment must begoodwill is performed annually, or on an interim basis upon the occurrence of a triggering event or change in circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The annual evaluation of goodwill for impairment was performed during the third quarteras of fiscal 2017April 30, 2020 and 2016 did not result in any impairments.impairment.
Indefinite-lived intangible assets
We have various indefinite-lived intangible assets representing trade names with69
Slower recovery resulting from extended project delays, an increase in discount rates, unfavorable changes in earnings multiples, or a decline in future cash flow projections, among other factors, may cause a change in circumstances indicating that the carrying value of $466.9 million asour goodwill may not be recoverable. If future financial assumptions significantly differ from those evaluated in the assessment noted above due to duration or magnitude of the impact of COVID-19, we can provide no assurance that a future goodwill impairment charge would not be incurred.
The below table summarizes our changes in goodwill related to the acquisitions that occurred during the fiscal years ended September 30, 20172020 and 2019. Refer to Note 3. Business Combinations for additional information regarding these acquisitions.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Company Name |
|
Voalte | | .
Breathe | |
Excel Medical | |
Connecta | | Videomed |
| Date of Acquisition | April 1, 2019 | | September 3, 2019 | | January 10, 2020 | | May 18, 2020 | | July 21, 2020 |
| Segment assigned Goodwill | Patient Support Systems | | Front Line Care | | Patient Support Systems | | Front Line Care | | Surgical Solution |
| Percentage of Goodwill assigned to segment | 100% | | 100% | | 100% | | 100% | | 100% |
For the fiscal year ended September 30, 2016. 2019, we completed a disposition to sell certain of our surgical consumable products and related assets. All goodwill associated with this disposition was included in our Surgical Solutions segment. Refer to Note 3. Business Combinations for additional information.
Intangible Assets
Intangible assets are stated at cost and consist predominantly of software, patents, acquired technology, trademarks, trade names and acquired customer relationship assets. With the exception of certain indefinite-lived trade names, our intangible assets are amortized on a straight-line basis over periods generally ranging from 1 to 20 years and our capitalized software costs are amortized on a straight-line basis over periods ranging from 3 to 10 years.
Many of our intangible assets are not deductible for income tax purposes. A summary of intangible assets and the related accumulated amortization follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30 |
| | | 2020 | | 2019 |
| | Cost | | Accumulated Amortization | | Cost | | Accumulated Amortization |
| Customer relationships | | $ | 633.2 | | | $ | 358.7 | | | $ | 658.1 | | | $ | 333.8 | |
| Trademarks and trade names | | 45.3 | | | 25.7 | | | 51.5 | | | 24.0 | |
| Developed technology | | 287.9 | | | 116.5 | | | 278.6 | | | 79.5 | |
Software 1 | | | | | | | | |
Software for internal use | | 159.3 | | | 119.2 | | | 136.6 | | | 115.4 | |
| Software to be sold | | 55.1 | | | 29.5 | | | 39.9 | | | 27.6 | |
Other 2 | | 25.8 | | | 17.7 | | | 28.4 | | | 16.7 | |
| Total definite-lived | | $ | 1,206.6 | | | $ | 667.3 | | | $ | 1,193.1 | | | $ | 597.0 | |
Indefinite-lived 3 | | 437.4 | | | — | | | 437.4 | | | — | |
| Total identifiable intangible assets | | $ | 1,644.0 | | | $ | 667.3 | | | $ | 1,630.5 | | | $ | 597.0 | |
1 Software consists mainly of capitalized costs associated with internal use software, including applicable costs associated with the implementation and upgrade of our enterprise resource planning systems. In addition, software includes capitalized development costs for software products to be sold. Software amortization expense was $9.2 million, $10.3 million and $11.1 million for the fiscal years ended September 30, 2020, 2019 and 2018 and was primarily included in Selling and administrative expenses. |
2 Other intangible assets primarily comprised of patents, non-competition agreements and intellectual property rights. |
3 Indefinite-lived intangible assets represent primarily the Welch Allyn trade name with a carrying value of $434.0 million as of September 30, 2020 and 2019. |
Testing for indefinite-lived intangible asset impairment must beis performed annually, or on an interim basis upon the occurrence of a triggering event or change in circumstances that would more likely than not reduce the fair value of anthe indefinite-lived intangible asset below its carrying amount. The annual evaluation of indefinite-lived intangible assets was performed during the third quarteras of fiscal 2017April 30, 2020 and 2016 did not result in any impairment.
Amortization expense for definite-lived intangible assets for the fiscal years ended September 30, 2020, 2019 and 2018 was $118.2 million, $132.7 million and $117.9 million. Amortization expense for definite-lived intangible assets is expected to approximate the following for each of the next five fiscal years and thereafter:
54 | | | | | |
| | Amount |
| 2021 | $ | 121.5 | |
| 2022 | 105.1 | |
| 2023 | 85.9 | |
| 2024 | 72.0 | |
| 2025 | 58.1 | |
| 2026 and beyond | 96.7 | |
Note 4.5. Financing Agreements
Total debt consists of the following:
| | | | | | | | | | | |
| | September 30,
2020 | | September 30, 2019 |
Current portion of long-term debt1 | $ | 50.1 | | | $ | 471.7 | |
| Securitization Facility | 82.2 | | | 110.0 | |
| Note Securitization Facility | 90.0 | | | 78.7 | |
| Total Short-term borrowings | $ | 222.3 | | | $ | 660.4 | |
| | | |
| Revolving credit facility, matures August 2024 | $ | 0 | | | $ | 80.0 | |
| Senior secured Term Loan A, long-term-portion, matures August 2024 | 895.4 | | | 944.0 | |
| | | |
| Senior unsecured 5.00% notes due on February 15, 2025 | 297.5 | | | 296.9 | |
| Senior unsecured 4.375% notes due on September 17, 2027 | 419.5 | | | 418.7 | |
| Unsecured 7.00% debentures due on February 15, 2025 | 13.4 | | | 13.5 | |
| Unsecured 6.75% debentures due on December 15, 2027 | 29.7 | | | 29.7 | |
| Other | 0.2 | | | 0.3 | |
| Total Long-term debt | $ | 1,655.7 | | | $ | 1,783.1 | |
| Total debt | $ | 1,878.0 | | | $ | 2,443.5 | |
1 For September 30, 2019, includes the Senior unsecured 5.75% notes due on September 17, 2023 |
|
| | | | | | | |
| | September 30,
2017 | | September 30,
2016 |
| Revolving credit facilities | $ | 90.0 |
| | $ | 235.8 |
|
| Current portion of long-term debt | 109.8 |
| | 73.2 |
|
| Senior secured Term Loan A, long-term portion | 1,266.7 |
| | 1,372.3 |
|
| Senior unsecured 5.75% notes due on September 1, 2023 | 419.9 |
| | 419.1 |
|
| Senior unsecured 5.00% notes due on February 14, 2025 | 295.8 |
| | — |
|
| Unsecured 7.00% debentures due on February 15, 2024 | 13.6 |
| | 13.7 |
|
| Unsecured 6.75% debentures due on December 15, 2027 | 29.6 |
| | 29.6 |
|
| Securitization Program | 79.1 |
| | — |
|
| Other | 4.8 |
| | 4.8 |
|
| Total debt | 2,309.3 |
| | 2,148.5 |
|
| Less Short-term borrowings | 188.9 |
| | 210.1 |
|
| Total Long-term debt | $ | 2,120.4 |
| | $ | 1,938.4 |
|
Short-Term Borrowings
Securitization Facilities
In May 2017,April 2020, we entered into arenewed our 364-day $110.0 million accounts receivable securitization program (the "Securitization Program"“Securitization Facility”) with certain financial institutions.institutions for borrowings up to $110.0 million. We also renewed our additional 364-day facility for borrowings up to $90.0 million (the “Note Securitization Facility”) in April 2020. The terms and conditions of the renewed April 2020 facilities are substantially similar to the May 2019 facilities. Under the terms of each the Securitization Program,Facility and Note Securitization Facility, certain of our accounts receivable secure the amounts borrowed and cannot be used to pay our other debts or liabilities. The amount that we may borrow at a given point in timeof permissible borrowings outstanding is determined based on the amount of qualifying accounts receivable that are present at suchany point in time. As of September 30, 2017, $79.1 million wasBorrowings outstanding under the Securitization Program. Such outstanding borrowings under theFacility and Note Securitization ProgramFacility bear interest at London Interbank Offered Rate ("LIBOR")1-month U.S. LIBOR plus the applicable margin of 0.675%0.8% and 0.9% and are included as a component of Short-term borrowings, while the accounts receivable securing these obligations remain as a component of Trade accounts receivable, net of allowances in our Consolidated Balance Sheets. In addition, the agreement governing the Securitization Program contains various customary affirmative and negative covenants, and customary default and termination provisions. allowances.
Long-Term Debt
As of September 30, 2017, we2020, there were in compliance with these covenantsno outstanding borrowings on the Revolving Credit Facility and provisions.available borrowing capacity was $1,191.0 million after giving effect to the $9.0 million of outstanding standby letters of credit. As of September 30, 2019, there were $80.0 million outstanding borrowings on the Revolving Credit Facility, and available borrowing capacity was $1,112.8 million after giving effect to $7.2 million of outstanding standby letters of credit.
In February 2017,August 2019, we entered into $300.0 million of senior unsecured notes maturing February 2025 for purposes of financing the Mortara acquisition. These notes bear interest at a fixed rate of 5.00% annually. We also have outstanding senior unsecured notes of $425.0 million maturing in September 2023 that bear interest at a fixed rate of 5.75% annually (collectively, the "Senior Notes"). These Senior Notes were issued at par in a private placement offering and are not registered securities on any public market. All of the notes were outstanding as of September 30, 2017. We are not required to make any mandatory redemption or sinking fund payments with respect to the Senior Notes, other than in certain circumstances such as a change in control or material sale of assets. We may redeem the 5.75% and 5.00% notes prior to maturity, but doing so prior to September 1, 2021 and February 15, 2020 would require payment of a premium on any amounts redeemed, the amount of which varies based on the timing of the redemption. The indentures governing the Senior Notes contain certain covenants which impose limitations on the amount of dividends we may pay and the amount of common shares we may repurchase in the open market, but we do not expect these covenants to affect our current dividend policy or open share repurchase program. The terms of these indentures also impose certain restrictions on the amount and type of additional indebtedness we may obtain in the future, as well as the types of liens and guarantees we may provide.
In September 2016, we entered into an amended and restated senior credit agreement ("Senior(the “Senior Credit Agreement"Agreement”) for purposes of refinancing our then-existing senior secured credit facilities (originally entered into as partmaturing in 2021 (the “Prior Senior Secured Credit Facilities”). The Prior Senior Secured Credit Facilities consisted of the Welch Allyn acquisition) and funding the payoff of our then outstandinga senior secured Term Loan B facility. term loan facility (“2021 TLA Facility”) with an original principal amount of $1,462.5 million and a Senior Secured Revolving Credit Facility (“2021 Revolving Credit Facility”) providing borrowing capacity of up to $700.0 million, both maturing in September 2021. In fiscal 2019, we paid the outstanding balance of $1,038.4 million on the 2021 TLA Facility.
The Senior Credit Agreement consists of two facilities as follows:
•$1,462.51,000.0 million senior secured Term Loan A facility, ("TLA Facility"), maturing in September 2021
August 2024 (“2024 TLA Facility”)•Revolving Credit Facility, providing borrowing capacity of up to $700.0$1,200.0 million, maturing in SeptemberAugust 2024 (“2024 Revolving Credit Facility”)
In connection with the refinancing of the Prior Senior Secured Credit Facilities, we recorded $3.3 million in Loss on extinguishment of debt primarily related to the debt issuance costs previously capitalized for the 2021
The TLA Facility in fiscal 2019. We capitalized debt issuance costs of $2.5 million in connection with the 2024 TLA Facility and $3.7 million in connection with the 2024 Revolving Credit Facility (collectively, the "Senior SecuredFacility.
The Senior Credit Facilities")Agreement facilities bear interest at variable rates which are currently less than 3.0%approximate 1.4%. These interest rates are based primarily on the LIBOR, but under certain conditions could also be based on the U.S. Federal Funds Rate or the U.S. Prime Rate, at our option. We are able to voluntarily prepay outstanding loans under the 2024 TLA Facility at any time. In fiscal 2020, we made the required minimum payments of $50.0 million on the 2024 TLA Facility. In fiscal 2019, we made no payments on the 2024 TLA Facility.
The following table summarizes the scheduled maturities of the 2024 TLA Facility for fiscal years 20182021 through 2022:2024:
| | | | | |
| | Amount |
| 2021 | $ | 50.0 | |
| 2022 | 50.0 | |
| 2023 | 75.0 | |
| 2024 | 775.0 | |
|
| | | |
| | Amount |
| 2018 | $ | 109.7 |
|
| 2019 | $ | 146.3 |
|
| 2020 | $ | 146.3 |
|
| 2021 | $ | 987.2 |
|
| 2022 | $ | — |
|
Long-Term Debt Redemption
In September 2019, we issued senior unsecured notes of $425.0 million maturing September 2027 that bear interest at a fixed rate of 4.375% annually and capitalized debt issuance costs of $6.3 million. On September 30, 2017, there were $90.0 millionOctober 7, 2019, we used the net proceeds from the offering of outstanding borrowings onthese notes, together with funds borrowed from the 2024 Revolving Credit Facility, and available borrowing capacity was $601.6 million after giving effect to $8.4 million of outstanding standby letters of credit. The availability of borrowings under our Revolving Credit Facility is subject to our ability at the time of borrowing to meet certain specified conditions, including compliance with covenants contained in the Senior Credit Agreement.
The Senior Secured Credit Facilities are held with a syndicate of banks, which includes over 30 institutions. Our general corporate assets, including those of certainredeem all of our subsidiaries, collateralize these obligations.previously outstanding senior unsecured 5.75% notes due September 2023 (the “2023 Notes”) and pay the prepayment premium of $12.2 million. The Senior Credit Agreement contains financial covenants which specify30-day notice required to redeem the 2023 Notes was filed on September 7, 2019 and, as a maximum secured net leverage ratio and a minimum interest coverage ratio, as such terms are defined inresult, the Senior Credit Agreement. These financial covenants are measured at the endoutstanding liability of each fiscal quarter. The required ratios vary providing a gradually decreasing maximum secured net leverage ratio and a gradually increasing minimum interest coverage ratio, as set forth in the following table:
|
| | |
Fiscal Quarter Ended | Maximum
Secured Net
Leverage Ratio | Minimum
Interest Coverage
Ratio |
December 31, 2017 | 4.00x | 3.50x |
December 31, 2018 | 3.50x | 3.75x |
December 31, 2019 and thereafter | 3.00x | 4.00x |
We are in compliance with all applicable financial covenants under the Senior Credit Agreement$421.6 million as of September 30, 2017.
2019 was classified as current within short-term borrowings. In conjunction with the amendment of the Senior Secured Credit Facilities in September 2016,October 2019, we recorded a $10.8 million loss on extinguishment of debt related toof $15.6 million, which was comprised of a majority$12.2 million prepayment premium and $3.4 million of the debt issuance costs previously capitalized for the Term Loan B facility. We also incurred $6.5 million of costs related to the amendment, $4.5 million of which were capitalized as part of the new Senior Secured Credit Facilities.capitalized.
We are exposed to market risk from fluctuations in interest rates. We sometimes manage our exposure to interest rate fluctuations through the use of interest rate swaps. As of September 30, 2017, we had nine interest rate swap agreements, with notional amounts of $750.0 million, in aggregate, to hedge the variability of cash flows associated with a portion of the variable interest rate payments through September 2021 on the Senior Secured Credit Facilities. The interest rate swaps have effective start dates ranging between December 31, 2016 and September 8, 2020 and are designated as cash flow hedges. At September 30, 2017, these swaps were in a net asset position with an aggregate fair value of $7.3 million, of which $8.5 million were classified as Other assets and $1.2 million were classified as Other current liabilities. We classify fair value measurements on our interest rate swaps as Level 2, as described in Note 1.Fair Value
The fair value of our debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities. The book values of our short-term debt instrumentsSecuritization Facility, 2024 TLA Facility, and 2024 Revolving Credit Facility approximate fair value.
The estimated fair values of our long-term debt instruments are described in the table below:
|
| | | | | | | |
| | September 30,
2017 | | September 30,
2016 |
| Senior secured Term Loan A | $ | 1,364.8 |
| | $ | 1,441.0 |
|
| Senior unsecured 5.75% notes due on September 1, 2023 | 449.3 |
| | 454.0 |
|
| Senior unsecured 5.00% notes due on February 14, 2025 | 311.9 |
| | — |
|
| Unsecured debentures | 46.8 |
| | 45.8 |
|
| Total debt | $ | 2,172.8 |
| | $ | 1,940.8 |
|
| | | | | | | | | | | |
| | September 30,
2020 | | September 30, 2019 |
| Senior unsecured 5.00% notes due on February 14, 2025 | $ | 310.1 | | | $ | 312.4 | |
| Senior unsecured 4.375% notes due on September 15, 2027 | 441.2 | | | 435.4 | |
| Unsecured debentures | 48.0 | | | 48.1 | |
| Total | $ | 799.3 | | | $ | 795.9 | |
The estimated fair values of our long-term unsecured debentures were based on observable inputs such as quoted prices in markets that are not active. The estimated fair values of our term loans and the Senior Notes were based on quoted prices for similar liabilities. These fair value measurements were classified as Level 2, as described in Note 11. Summary of Significant Accounting Policies.
Debt Covenants
The facilities provided by the Senior Credit Agreement are held with a syndicate of banks, which includes 13 institutions. Our general corporate assets, with exceptions including those of certain of our Consolidated Financial Statements.subsidiaries, collateralize these obligations. The Senior Credit Agreement contains financial covenants that specify a maximum secured net leverage ratio and a minimum interest coverage ratio. These financial covenants are measured at the end of each quarter. The required maximum secured net leverage ratio is 3.00x and the required minimum interest coverage ratio is 4.00x. As of September 30, 2020, we were in compliance with all debt covenants under our financing agreements.
Note 5. Other Comprehensive Income6. Derivative Instruments and Hedging Activity
We are exposed to various market risks, including fluctuations in interest rates and variability in foreign currency exchange rates. We established policies, procedures and internal processes governing our management of market risks and the use of financial instruments to manage our exposure to such risks. We employ cash flow hedges, net investment hedges, and other undesignated derivative instruments to manage these risks.
Cash Flow Hedges
To manage our exposure to market risk from fluctuations in interest rates, we enter into interest rate swaps that are designated as cash flow hedges. As of September 30, 2020, we had interest rate swap agreements with an aggregate notional amount of $750.0 million to hedge the variability of cash flows through August 2024 associated with a portion of the variable interest rate payments on outstanding borrowings under our Senior Credit Agreement. As of September 30, 2019, we had interest rate swap agreements, with an aggregate notional amount of $750.0 million to hedge the variability of cash flows associated with a portion of the variable interest rate payments on outstanding borrowings under our Senior Credit Agreement through September 2021.
We are subject to variability in foreign currency exchange rates due to our international operations. We enter into currency exchange contracts that are designated as cash flow hedges to manage our exposure arising from fluctuating exchange rates related to specific and projected transactions. We operate this program pursuant to documented corporate risk management policies and do not enter into derivative transactions for speculative purposes. The sensitivity of earnings and cash flows to variability in exchange rates is assessed by applying an appropriate range of potential rate fluctuations to our assets, obligations, and projected results of operations denominated in foreign currencies. Our currency risk consists primarily of foreign currency denominated firm commitments and projected foreign currency denominated intercompany and third-party transactions. As of September 30, 2020, the notional amount of outstanding currency exchange contracts was $64.4 million. As of September 30, 2019, the notional amount of outstanding currency exchange contracts was $6.7 million. The maximum length of time over which we hedge transaction exposures is generally 15 months. Derivative gains and losses, initially reported as a component of Accumulated other comprehensive income (loss), are reclassified to earnings in the period when the transaction affects earnings.
Net Investment Hedges
As of September 30, 2020, we had outstanding cross-currency swap agreements, with an aggregate notional amount of $198.3 million to hedge the variability of U.S. dollar-Euro exchange rates through July 2023. These cross-currency swaps are designated as net investment hedges of subsidiaries using Euro as their functional currency.
We assess hedge effectiveness under the spot-to-spot method and record changes in fair value attributable to the translation of foreign currencies through Accumulated other comprehensive income (loss). We amortize the impact of all other changes in fair value of the derivative through Interest expense, which was income of $5.2 million for both the fiscal years ended September 30, 2020 and 2019.
Undesignated Derivative Instruments
We use forward contracts to mitigate the foreign exchange revaluation risk associated with recorded monetary assets and liabilities that are denominated in a non-functional currency. These derivative instruments are not formally designated as hedges and the terms of these instruments generally do not exceed one month. As of September 30, 2020, we had outstanding forward contracts not designated as hedges with aggregate notional amounts of $169.9 million. As of September 30, 2019, we had outstanding forward contracts not designated as hedges with aggregate notional amounts of $76.7 million. The following table summarizes unrealized and realized gains and losses for forward contracts not designated as hedges, which are recorded in Investment income (expense) and other, net.
| | | | | | | | | | | | | | |
| | Year Ended September 30 |
| | 2020 | | 2019 |
| Unrealized gains (losses) | | $ | 0 | | | $ | (0.2) | |
| Realized gains (losses) | | 3.0 | | | (2.9) | |
Fair Value
We classify fair value measurements on our derivative instruments as Level 2. The estimated fair values of our derivative instruments are described in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Instruments | | September 30, 2020 | | Consolidated Balance Sheet Classification | | September 30, 2019 | | Consolidated Balance Sheet Classification |
| Interest Rate Swaps | | $ | — | | | Other assets | | $ | 0.9 | | | Other assets |
| Interest Rate Swaps | | (46.3) | | | Other current liabilities | | (7.7) | | | Other current liabilities |
| Currency Exchange Contracts | | (0.4) | | | Other current liabilities | | 0.2 | | | Other current assets |
| Cross-Currency Swaps | | 9.7 | | | Other assets | | 16.9 | | | Other assets |
| Undesignated Forward Contracts | | $ | — | | | Other assets | | (0.2) | | | Other current liabilities |
| Total | | $ | (37.0) | | | | | $ | 10.1 | | | |
Note 7. Leases
Hillrom as the Lessee
We determine if an arrangement is a lease or contains a lease at contract inception. We lease real estate, automobiles, and equipment under various operating leases. A lease liability and ROU asset is recognized for operating leases with terms greater than one year at the lease commencement date. The lease liability is measured as the present value of all remaining fixed payments calculated using our estimated secured incremental borrowing rate. The ROU asset is measured as the sum of the lease liability and any initial indirect costs incurred, less any lease incentives received. We use our estimated secured incremental borrowing rate as most lease agreements do not specify an interest rate. Our lease agreements include leases that have both lease and non-lease components. We elected to account for lease components and the associated non-lease components as a single lease component.
Our leases have remaining lease terms of approximately 1 year to 8 years. Many of our real estate and equipment leases include options to renew. Renewal periods are generally not included when calculating the remaining lease term unless we are reasonably certain to exercise a renewal option based on beneficial terms or significance of the leased asset to our operations.
Expense for operating leases and leases with a term of one year or less is recognized on a straight-line basis over the lease term. Lease expense is recorded in Cost of goods sold or Selling and administrative expenses based on the purpose of the leased asset. The following table summarizes our lease expense:
| | | | | | | | |
| | September 30, 2020 |
| Operating lease expense | | $ | 27.8 | |
| Short-term leases and variable lease payments | | 11.5 | |
| Total | | $ | 39.3 | |
The following tables representtable summarizes the changesbalance sheet classification of our operating leases and amounts of the ROU asset and lease liability as of September 30, 2020:
| | | | | | | | | | | | | | |
| | Consolidated Balance Sheet Classification | | September 30, 2020 |
| Right-of-use assets | | Other assets | | $ | 72.3 | |
| Current lease liabilities | | Other current liabilities | | $ | 22.8 | |
| Non-current lease liabilities | | Other long-term liabilities | | $ | 54.4 | |
The following table summarizes our supplemental information related to operating leases as of September 30, 2020:
| | | | | | | | |
| | September 30, 2020 |
| Supplemental information: | | |
| Weighted-average discount rate | | 3.3 | % |
| Weighted-average remaining lease term in years | | 4.48 |
| | |
| Cash Flow information: | | |
| Operating cash flows paid for amounts included in the measurement of lease liabilities | | $ | 27.6 |
| Right of use assets obtained in exchange for new lease liabilities | | 16.6 |
The following table summarizes the maturities of our operating leases as of September 30, 2020:
| | | | | | | | |
| | Amount |
| 2021 | | $ | 25.1 | |
| 2022 | | $ | 20.2 | |
| 2023 | | $ | 14.4 | |
| 2024 | | $ | 9.0 | |
| 2025 | | $ | 5.4 | |
| Thereafter | | $ | 10.4 | |
| Total lease payments | | $ | 84.5 | |
| Less: imputed interest | | $ | (7.3) | |
| Total lease liability | | $ | 77.2 | |
Disclosures Related to Periods Prior to Adopting the New Lease Guidance
Future minimum payments under non-cancellable operating leases (excluding executory costs) aggregating $94.9 million for manufacturing facilities, warehouse distribution centers, service centers, sales offices, automobiles, and other equipment consisted of the following as of the fiscal year ended September 30, 2019:
| | | | | | | | |
| | Amount |
| 2020 | | $ | 25.7 | |
| 2021 | | 21.4 | |
| 2022 | | 15.7 | |
| 2023 | | 11.1 | |
| 2024 | | 6.4 | |
| 2025 and beyond | | 14.6 | |
Rental expense in accumulatedthe fiscal years ended September 30, 2019 and 2018 was $39.8 million and $41.3 million.
Hillrom as the Lessor
We make certain products available to customers under short-term lease arrangements. Rental usage of these products is provided as an alternative to product sales and is short-term in nature. Products primarily include smart beds, including, but not limited to, bariatric, critical care, maternal, and home care beds, as well as other surfaces. These lease arrangements provide our customers with our products during periods of peak demand or often times for specialty purposes. Additionally, we provide wearable, non-invasive ventilation products to patients covered by monthly medical insurance reimbursements, which are considered month-to-month leasing arrangements. Income arising from these lease arrangements where we are the lessor is recognized within Rental revenue. We accounted for these lease arrangements as operating leases.
Note 8. Retirement and Postretirement Benefit Plans
Our retirement plans consist of defined benefit plans, postretirement health care plans and defined contribution savings plans. Plans cover certain employees both in and outside of the United States.
Retirement Plans
We sponsor five defined benefit retirement plans. Those plans include a master defined benefit retirement plan in the United States, a nonqualified supplemental executive defined benefit retirement plan, and three defined benefit retirement plans covering employees in Germany and France. Benefits for such plans are based primarily on years of service and the employee’s level of compensation in specific periods of employment. We contribute funds to trusts as necessary to provide for current service and any unfunded projected future benefit obligation over a reasonable period of time. All of our plans have a September 30 measurement date.
Effect on Operations
The following table details the components of net pension expense for our defined benefit retirement plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended September 30 | | Statements of Consolidated |
| | | 2020 | | 2019 | | 2018 | | Income Classification |
| Service cost | | $ | 1.8 | | | $ | 1.8 | | | $ | 1.6 | | | Cost of goods sold |
| Service cost | | 3.4 | | | 2.7 | | | 3.2 | | | Selling and administrative expenses |
| Interest cost | | 8.7 | | | 12.5 | | | 11.0 | | | Investment income (expense) and other, net |
| Expected return on plan assets | | (14.0) | | | (14.8) | | | (15.7) | | | Investment income (expense) and other, net |
| Amortization of unrecognized prior service cost, net | | 0 | | | 0.1 | | | 0.1 | | | Investment income (expense) and other, net |
| Amortization of net loss | | 6.9 | | | 2.4 | | | 4.5 | | | Investment income (expense) and other, net |
| Net periodic benefit cost | | 6.8 | | | 4.7 | | | 4.7 | | | |
Settlement loss 1 | | 8.5 | | | — | | | — | | | Investment income (expense) and other, net |
Special termination benefits 2 | | 0.5 | | | — | | | — | | | Special charges |
| Net pension expense | | $ | 15.8 | | | $ | 4.7 | | | $ | 4.7 | | | |
1 On March 9, 2020, we transferred pension assets totaling $40.6 million to purchase annuity contracts for a certain population of retirees with a third-party insurance company. As a result, we recognized a non-cash settlement loss of $8.5 million for the fiscal year ended September 30, 2020, which is recorded as a component of Investment income (expense) and other, net in the Consolidated Statements of Income. |
2 In September 2020, we offered certain employees in the United States the option to participate in a voluntary early retirement plan. The employees who accepted the offer received special termination benefits, which were recorded as a component of Special charges in the Consolidated Statements of Income. |
Obligations and Funded Status
The change in benefit obligations, plan assets and funded status, along with amounts recognized in the Consolidated Balance Sheets for our defined benefit retirement plans were as follows:
| | | | | | | | | | | | | | | | | | |
| | | Year Ended September 30 | | | | |
| | | 2020 | | 2019 | | | | |
| Change in benefit obligation: | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 380.4 | | | $ | 334.6 | | | | | |
| Service cost | | 5.2 | | | 4.5 | | | | | |
| Interest cost | | 8.7 | | | 12.5 | | | | | |
| Actuarial loss | | 28.7 | | | 43.4 | | | | | |
| Benefits paid | | (12.6) | | | (13.3) | | | | | |
Acquisition1 | | 3.5 | | | 0 | | | | | |
| Plan settlements | | (44.2) | | | — | | | | | |
| Special termination benefits | | 0.5 | | | — | | | | | |
| Exchange rate loss (gain) | | 1.6 | | | (1.3) | | | | | |
| Benefit obligation at end of year | | 371.8 | | | 380.4 | | | | | |
| | | | | | | | |
| Change in plan assets: | | | | | | | | |
| Fair value of plan assets at beginning of year | | 310.6 | | | 279.8 | | | | | |
| Actual return on plan assets | | 33.4 | | | 35.1 | | | | | |
| Employer contributions | | 1.0 | | | 9.0 | | | | | |
| Benefits paid | | (12.6) | | | (13.3) | | | | | |
Acquisition1 | | 3.5 | | | — | | | | | |
| Plan settlements | | (44.2) | | | — | | | | | |
| Fair value of plan assets at end of year | | 291.7 | | | 310.6 | | | | | |
| Funded status and net amounts recognized | | $ | (80.1) | | | $ | (69.8) | | | | | |
| | | | | | | | |
| Amounts recorded in the Consolidated Balance Sheets: | | | | | | | | |
| Accrued pension benefits, current portion | | $ | (1.5) | | | $ | (1.2) | | | | | |
| Accrued pension benefits, long-term | | (78.6) | | | (68.6) | | | | | |
| Net amount recognized | | $ | (80.1) | | | $ | (69.8) | | | | | |
1 Represents the plan assets and obligations assumed as part of the defined benefit retirement plan of Excel Medical, which was acquired on January 10, 2020, and subsequently settled and terminated as of September 30, 2020. | | | | |
In addition to the amounts above, net actuarial losses of $64.9 million and prior service costs of $0.4 million, less the tax effect of $16.3 million are included as components of Accumulated other comprehensive income (loss) as of September 30, 2020. In addition to the amounts above, net actuarial losses of $70.6 million and prior service costs of $0.4 million, less the tax effect of $17.2 million, are included as components of Accumulated other comprehensive income (loss) as of September 30, 2019.
The estimated net actuarial loss and prior service cost for our defined benefit retirement plans that will be amortized from Accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $6.3 million and $0.1 million.
Accumulated Benefit Obligation
The accumulated benefit obligation for all defined benefit pension plans was $352.1 million and $362.9 million as of September 30, 2020 and September 30, 2019, respectively. Selected information for our plans, including plans with accumulated benefit obligations exceeding plan assets, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2020 | | September 30, 2019 |
| | | PBO | | ABO | | Plan Assets | | PBO | | ABO | | Plan Assets |
| Master plan | | $ | 343.2 | | | $ | 325.7 | | | $ | 291.7 | | | $ | 353.4 | | | $ | 338.0 | | | $ | 310.5 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| International plans | | 23.0 | | | 20.8 | | | 0 | | | 21.7 | | | 19.6 | | | 0.1 | |
| Supplemental executive plan | | 5.6 | | | 5.6 | | | 0 | | | 5.3 | | | 5.3 | | | 0 | |
| | | $ | 371.8 | | | $ | 352.1 | | | $ | 291.7 | | | $ | 380.4 | | | $ | 362.9 | | | $ | 310.6 | |
Actuarial Assumptions
The weighted average assumptions used in accounting for our domestic pension plans were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | 2020 | | 2019 | | 2018 |
Weighted average assumptions to determine benefit obligations at the measurement date: | | | | | | |
| Discount rate for obligation | | 2.7% | | 3.2% | | 4.2% |
| Rate of compensation increase | | 2.6% | | 2.6% | | 3.0% |
| | | | | | |
Weighted average assumptions to determine benefit cost for the year: | | | | | | |
| Discount rate for expense | | 3.2% | | 4.2% | | 3.9% |
| Expected rate of return on plan assets | | 5.3% | | 5.5% | | 6.0% |
| Rate of compensation increase | | 2.6% | | 3.0% | | 3.0% |
The discount rates used in the valuation of our defined benefit pension plans are evaluated annually based on current market conditions. In setting these rates, we utilize long-term bond indices and yield curves as a preliminary indication of interest rate movements, and then make adjustments to the respective indices to reflect differences in the terms of the bonds covered under the indices in comparison to the projected outflow of our pension obligations. The overall expected long-term rate of return is based on historical and expected future returns, which are inflation adjusted and weighted for the expected return for each component of the investment portfolio, as well as taking into consideration economic and capital market conditions. The rate of assumed compensation increase is also based on our specific historical trends of past wage adjustments. The weighted average discount rate assumptions used for our international plans are lower than our domestic plan assumptions and do not significantly affect the consolidated net benefit obligation or net periodic benefit cost balances.
Plan Assets
The weighted average asset allocations of our master defined benefit retirement plan as of September 30, 2020 and 2019, by componentasset category, along with target allocations, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 and 2019 Target Allocation | | | | 2020 Actual Allocation | | 2019 Actual Allocation |
| | | | | | | | |
| Equity securities | | 31%-37% | | | | 34% | | 32% |
| Fixed income securities | | 63%-69% | | | | 66% | | 68% |
| Total | | | | | | 100% | | 100% |
We have a Plan Committee that sets investment guidelines with the assistance of an external consultant. These guidelines are established based on market conditions, risk tolerance, funding requirements and expected benefit payments. The Plan Committee also oversees the investment allocation process and monitors asset performance. As pension liabilities are long-term in nature, we employ a long-term total return approach to maximize the long-term rate of return on plan assets for a prudent
level of risk. Target allocations are guidelines, not limitations, and plan fiduciaries may occasionally approve allocations above or below a target range or elect to rebalance the portfolio within the targeted range.
The investment portfolio contains a diversified portfolio of fixed income securities and equities. Securities are also diversified in terms of domestic and international securities, short-term and long-term securities, growth and value styles, large cap and small cap stocks. The primary investment strategy is a dynamic target allocation method that periodically rebalances among various investment categories depending on the current funded positions. This program is designed to actively move from return-seeking investments (such as equities) toward liability-hedging investments (such as long-duration fixed income) as funding levels improve.
Trust assets are invested subject to the following policy restrictions: short-term securities must be rated A2/P2 or higher; all fixed-income securities shall have a credit quality rating “BBB” or higher; and investments in equities in any one company may not exceed 10% of the equity portfolio.
Fair Value Measurements of Plan Assets
Cash as part of plan assets was $2.1 million and $4.2 million as of September 30, 2020 and 2019, respectively, and was classified as a Level 1 financial instrument.
The following table summarizes these assets by category:
| | | | | | | | | | | | | | |
| | Year Ended September 30 |
| | 2020 | | 2019 |
| Equities | | | | |
| U.S. companies | | $ | 49.7 | | | $ | 49.6 | |
| International companies | | 48.9 | | | 50.2 | |
| Fixed income securities | | 191.0 | | | 206.6 | |
| Total plan assets at fair value, excluding cash | | $ | 289.6 | | | $ | 306.4 | |
These investments are commingled funds and/or collective trusts valued using the net asset value (“NAV”) unit price provided by the fund administrator. The NAV is based on the value of the underlying assets owned by the fund.
Cash Flows
Our U.S. master defined benefit plan is funded in excess of 85%, as measured under the requirements of the Pension Protection Act of 2006, and therefore we expect that the plan will not be subject to the “at risk” funding requirements of this legislation.
In the fiscal years ended September 30, 2020 and 2019, we contributed cash of $1.0 million and $9.0 million, respectively, to our defined benefit retirement plans, of which $8.0 million was a voluntary contribution to our U.S. defined benefit retirement plan in the fiscal year ended 2019. We will not be required to contribute to our master defined benefit retirement plan in fiscal 2021 due to the current funding level; however, minimal contributions will be required for our unfunded plans.
Estimated Future Benefit Payments
The benefit payments, which are expected to be funded through plan assets and company contributions and reflect expected future service, are expected to be paid as follows:
| | | | | |
| | Pension Benefits |
| 2021 | $ | 12.0 | |
| 2022 | 13.1 | |
| 2023 | 13.9 | |
| 2024 | 14.9 | |
| 2025 | 15.5 | |
| 2026-2030 | 90.5 | |
Defined Contribution Savings Plans
We have defined contribution savings plans that cover substantially all U.S. employees and certain non-U.S. employees. The general purpose of these plans is to provide additional financial security in retirement by providing employees with an incentive to make regular savings. Our contributions to the plans are based on eligibility and employee contributions. Expense under these plans for the fiscal years ended September 30, 20172020, 2019 and 2016:2018 was $31.9 million, $29.0 million and $28.4 million.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, 2017 |
| | Other comprehensive income (loss) | | Accumulated other comprehensive income (loss) |
| | Prior to
reclassification | | Reclassification
from | | Pre-tax | | Tax effect | | Net of tax | | Beginning
balance | | Net activity | | Ending
balance |
| Derivative instruments and hedges | $ | 12.7 |
| | $ | (0.9 | ) | | $ | 11.8 |
| | $ | (4.4 | ) | | $ | 7.4 |
| | $ | (3.1 | ) | | $ | 7.4 |
| | $ | 4.3 |
|
| Foreign currency translation adjustment | 32.9 |
| | 1.0 |
| | 33.9 |
| | — |
| | 33.9 |
| | (115.2 | ) | | 33.9 |
| | (81.3 | ) |
| Change in pension and postretirement defined benefit plans | 22.1 |
| | 5.9 |
| | 28.0 |
| | (10.2 | ) | | 17.8 |
| | (50.8 | ) | | 17.8 |
| | (33.0 | ) |
| Total | $ | 67.7 |
| | $ | 6.0 |
| | $ | 73.7 |
| | $ | (14.6 | ) | | $ | 59.1 |
| | $ | (169.1 | ) | | $ | 59.1 |
| | $ | (110.0 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, 2016 |
| | Other comprehensive income (loss) | | Accumulated other comprehensive income (loss) |
| | Prior to reclassification | | Reclassification from | | Pre-tax | | Tax effect | | Net of tax | | Beginning balance | | Net activity | | Ending balance |
| Derivative instruments and hedges | $ | (4.9 | ) | | $ | (0.1 | ) | | $ | (5.0 | ) | | $ | 1.9 |
| | $ | (3.1 | ) | | $ | — |
| | $ | (3.1 | ) | | $ | (3.1 | ) |
| Foreign currency translation adjustment | (22.4 | ) | | — |
| | (22.4 | ) | | — |
| | (22.4 | ) | | (92.8 | ) | | (22.4 | ) | | (115.2 | ) |
| Change in pension and postretirement defined benefit plans | (8.5 | ) | | 4.4 |
| | (4.1 | ) | | 1.3 |
| | (2.8 | ) | | (48.0 | ) | | (2.8 | ) | | (50.8 | ) |
| Total | $ | (35.8 | ) | | $ | 4.3 |
| | $ | (31.5 | ) | | $ | 3.2 |
| | $ | (28.3 | ) | | $ | (140.8 | ) | | $ | (28.3 | ) | | $ | (169.1 | ) |
In addition to defined benefit retirement plans, we also offer 2 postretirement health care plans in the United States that provide health care benefits to qualified retirees and their dependents. The plans are closed to new participants and include retiree cost sharing provisions and generally extends retiree coverage for medical and prescription benefits beyond the COBRA continuation period to the date of Medicare eligibility. These plans have a measurement date of September 30.
The following table representsnet periodic benefit cost related to postretirement health care plans has not been significant for the items reclassified outfiscal years ended September 30, 2020, 2019 or 2018. In September 2020, we offered certain employees in the United States the option to participate in a voluntary early retirement plan. The employees who accepted the offer received special termination benefits of $0.4 million which were recorded as a component of Special charges in the Consolidated Statements of Income.
The change in the accumulated postretirement benefit obligation was as follows:
| | | | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2020 | | 2019 |
| Change in benefit obligation: | | | | |
| Benefit obligation at beginning of year | | $ | 12.7 | | | $ | 17.0 | |
| Service cost | | 0.1 | | | 0.3 | |
| Interest cost | | 0.2 | | | 0.5 | |
| | | | |
| | | | |
| Actuarial gain | | (0.4) | | | (4.1) | |
| Benefits paid | | (1.0) | | | (1.3) | |
| Retiree contributions | | 0.2 | | | 0.3 | |
| Special termination benefits | | 0.4 | | | — | |
| Benefit obligation at end of year | | $ | 12.2 | | | $ | 12.7 | |
| | | | |
| Amounts recorded in the Consolidated Balance Sheets: | | | | |
| Accrued benefits obligation, current portion | | $ | 1.6 | | | $ | 1.3 | |
| Accrued benefits obligation, long-term | | 10.6 | | | 11.4 | |
| Net amount recognized | | $ | 12.2 | | | $ | 12.7 | |
In addition to the amounts above, net actuarial gains of $10.9 million and prior service credits of $0.4 million, less the tax effect of $2.9 million are included as components of Accumulated other comprehensive lossincome (loss) as of September 30, 2020. Net actuarial gains of $11.9 million and prior service credits of $0.6 million, less the related tax effects during fiscal 2017effect of $2.4 million are included as components of Accumulated other comprehensive income (loss) as of September 30, 2019.
The estimated net actuarial gain and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30 |
| | 2017 | | 2016 |
| | Amount reclassified | | Tax effect | | Net of tax | | Amount reclassified | | Tax effect | | Net of tax |
| Derivative instruments and hedges (a) | $ | (0.9 | ) | | $ | 0.3 |
| | $ | (0.6 | ) | | $ | (0.1 | ) | | $ | — |
| | $ | (0.1 | ) |
| Foreign currency translation adjustment (b) | $ | 1.0 |
| | $ | — |
| | $ | 1.0 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Change in pension and postretirement defined benefit plans (c) | $ | 5.9 |
| | $ | (2.2 | ) | | $ | 3.7 |
| | $ | 4.4 |
| | $ | (1.3 | ) | | $ | 3.1 |
|
(a) Reclassifiedprior service benefit for our postretirement health care plans that will be amortized from accumulatedAccumulated other comprehensive income (loss) into Interest expense.
(b) Reclassified from accumulated other comprehensive income (loss) into Special charges.
(c) Reclassified from accumulated other comprehensive income (loss) into Cost of goods sold and Selling and administrative expenses. These components are included in the computation of net periodic pension expense.benefit cost over the next fiscal year are $1.6 million and $0.2 million.
The below table summarizes the discount rates used in accounting for our postretirement plans:
| | | | | | | | | | | | | | | | | | | | |
| | | September 30 |
| | | 2020 | | 2019 | | 2018 |
| Discount rate used to determine: | | | | | | |
| Net periodic benefit cost for the postretirement health care plans | | 2.6 | % | | 4.0 | % | | 3.3 | % |
| Benefit obligation | | 1.8 | % | | 3.0 | % | | 4.0 | % |
As of September 30, 2020, the health care cost trend rates for the plans were generally assumed to be in the ranges of 5.8% to 6.4%, trending down to a rate of 4.5% over the long-term. A one-percentage-point increase/decrease in the assumed health care cost trend rates as of September 30, 2020 would cause an increase/decrease in service and interest costs of less than $0.1 million, along with an increase/decrease in the benefit obligation of $0.6 million.
We fund the postretirement health care plans as benefits are paid and current plan benefits are expected to require contributions of approximately $1.6 million in fiscal 2021 and approximately $1.0 million per fiscal year thereafter.
Note 6. Retirement and Postretirement Benefit Plans9. Other Comprehensive Income
Our retirement plans consist of defined benefit plans, postretirement healthcare plans and defined contribution savings plans. Plans cover certain employees both in and outside of the U.S.
Retirement Plans
We sponsor five defined benefit plans. Those plans include a master defined benefit retirement plan, a nonqualified supplemental executive defined benefit retirement plan and three defined benefit retirement plans covering employees in Germany and France. Benefits for such plans are based primarily on years of service and the employee’s level of compensation during specific periods of employment. We contribute funds to trusts as necessary to provide for current service and for any unfunded projected future benefit obligation over a reasonable period of time. All of our plans have a September 30 measurement date.
Effect on Operations
The components of net periodic benefit cost for our defined benefit retirement plans were as follows:
|
| | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2017 | | 2016 | | 2015 |
| Service cost | | $ | 5.8 |
| | $ | 5.0 |
| | $ | 5.4 |
|
| Interest cost | | 9.9 |
| | 10.9 |
| | 14.6 |
|
| Expected return on plan assets | | (14.6 | ) | | (13.0 | ) | | (16.7 | ) |
| Amortization of unrecognized prior service cost, net | | 0.2 |
| | 0.3 |
| | 0.6 |
|
| Amortization of net loss | | 6.1 |
| | 4.5 |
| | 5.2 |
|
| Net periodic benefit cost | | 7.4 |
|
| 7.7 |
|
| 9.1 |
|
| Settlement charge | | — |
| | — |
| | 9.6 |
|
| Special termination benefits | | 0.1 |
| | — |
| | — |
|
| Net pension expense | | $ | 7.5 |
|
| $ | 7.7 |
|
| $ | 18.7 |
|
Beginning in the first quarter of fiscal 2016, we elected to change the method we use to estimate the service and interest cost components of net periodic benefit cost for our defined benefit pension plans to a spot yield curve approach. Previously, we estimated the service and interest cost components of pension expense using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Under the new approach, we apply discounting using individual spot rates from a yield curve composed of the rates of return on several hundred high-quality, fixed income corporate bonds available at the measurement date. These spot rates align to each of the projected benefit obligations and service cost cash flows. The service cost component relates to the active participants in the plan, so the relevant cash flows on which to apply the yield curve are considerably longer in duration on average than the total projected benefit obligation cash flows, which also include benefit payments to retirees. Interest cost is computed by multiplying each spot rate by the corresponding discounted projected benefit obligation cash flows. The spot yield curve approach reduces any actuarial gains and losses based upon interest rate expectations (e.g., built-in gains in interest cost in an upward sloping yield curve scenario), or gains and losses merely resulting from the timing and magnitude of cash outflows associated with our benefit obligations. The change does not affect the measurement of the total benefit obligations as the change in service and interest costs offsets the actuarial gains and losses recorded in other comprehensive income.
We made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a better measurement of service and interest costs. This change is considered a change in estimate and is accounted for on a prospective basis starting in fiscal year 2016.
In April 2015, we offered all terminated vested participants of our domestic master defined benefit retirement plan an option to receive a lump sum cash payout in lieu of their right to future periodic benefit payments under the plan upon their retirement. Lump sums of $42.3 million were paid to participants in September 2015, triggering a plan settlement charge of $9.6 million, which is recorded as a component of Special charges on the Statements of Consolidated Income.
Obligations and Funded Status
The change in benefit obligations, plan assets and funded status, along with amounts recognized in the Consolidated Balance Sheets for our defined benefit retirement plans were as follows:
|
| | | | | | | | |
| | | Year Ended September 30 |
| | | 2017 | | 2016 |
| Change in benefit obligation: | | | | |
| Benefit obligation at beginning of year | | $ | 347.1 |
| | $ | 315.5 |
|
| Service cost | | 5.8 |
| | 5.0 |
|
| Interest cost | | 9.9 |
| | 10.9 |
|
| Actuarial loss (gain) | | (5.7 | ) | | 27.4 |
|
| Benefits paid | | (12.5 | ) | | (11.9 | ) |
| Special termination benefits | | 0.1 |
| | — |
|
| Exchange rate loss | | 1.1 |
| | 0.2 |
|
| Benefit obligation at end of year | | 345.8 |
|
| 347.1 |
|
| | | | | |
| Change in plan assets: | | |
| | |
|
| Fair value of plan assets at beginning of year | | 267.0 |
| | 219.1 |
|
| Actual return on plan assets | | 28.8 |
| | 28.8 |
|
| Employer contributions | | 1.1 |
| | 31.0 |
|
| Benefits paid | | (12.5 | ) | | (11.9 | ) |
| Fair value of plan assets at end of year | | 284.4 |
|
| 267.0 |
|
| Funded status and net amounts recognized | | $ | (61.4 | ) |
| $ | (80.1 | ) |
| | | | | |
| Amounts recorded in the Consolidated Balance Sheets: | | |
| | |
|
| Accrued pension benefits, current portion | | $ | (1.2 | ) | | $ | (1.1 | ) |
| Accrued pension benefits, long-term | | (60.2 | ) | | (79.0 | ) |
| Net amount recognized | | $ | (61.4 | ) |
| $ | (80.1 | ) |
In addition to the amounts above, net actuarial losses of $59.9 million and prior service costs of $0.6 million, less an applicable aggregate tax effect of $22.8 million are included as components of accumulated other comprehensive loss at September 30, 2017. In addition to the amounts above, net actuarial losses of $85.7 million and prior service costs of $0.8 million, less an applicable aggregate tax effect of $32.2 million are included as components of accumulated other comprehensive loss at September 30, 2016. The estimated net actuarial loss and prior service cost for our defined benefit retirement plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $4.5 million and $0.1 million, respectively.
Accumulated Benefit Obligation
The accumulated benefit obligation for all defined benefit pension plans was $325.7 million and $326.3 million at September 30, 2017 and 2016. Selected information for our plans, including plans with accumulated benefit obligations exceeding plan assets, was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30 |
| | | 2017 | | 2016 |
| | | PBO | | ABO | | Plan Assets | | PBO | | ABO | | Plan Assets |
| Master plan | | $ | 319.8 |
| | $ | 301.5 |
| | $ | 284.1 |
| | $ | 319.6 |
| | $ | 300.7 |
| | $ | 266.8 |
|
| International plans | | 20.8 |
| | 19.0 |
| | 0.3 |
| | 22.2 |
| | 20.3 |
| | 0.2 |
|
| Supplemental executive plan | | 5.2 |
| | 5.2 |
| | — |
| | 5.3 |
| | 5.3 |
| | — |
|
| | | $ | 345.8 |
|
| $ | 325.7 |
|
| $ | 284.4 |
|
| $ | 347.1 |
|
| $ | 326.3 |
|
| $ | 267.0 |
|
Actuarial Assumptions
The weighted average assumptions used in accounting for our domestic pension plans were as follows:
|
| | | | | | |
| | | 2017 | | 2016 | | 2015 |
Weighted average assumptions to determine benefit obligations at the measurement date: | | | | | | |
| Discount rate for obligation | | 3.9% | | 3.7% | | 4.4% |
| Rate of compensation increase | | 3.0% | | 3.0% | | 3.0% |
| | | | | | | |
Weighted average assumptions to determine benefit cost for the year: | | | | | | |
| Discount rate for expense | | 3.7% | | 4.4% | | 4.5% |
| Expected rate of return on plan assets | | 5.8% | | 5.8% | | 6.8% |
| Rate of compensation increase | | 3.0% | | 3.0% | | 3.0% |
The discount rates used in the valuation of our defined benefit pension plans are evaluated annually based on current market conditions. In setting these rates we utilize long-term bond indices and yield curves as a preliminary indication of interest rate movements, and then make adjustments to the respective indices to reflect differences in the terms of the bonds covered under the indices in comparison to the projected outflow of our pension obligations. The overall expected long-term rate of return is based on historical and expected future returns, which are inflation adjusted and weighted for the expected return for each component of the investment portfolio, as well as taking into consideration economic and capital market conditions. The rate of assumed compensation increase is also based on our specific historical trends of past wage adjustments. The weighted average discount rate assumptions used for our international plans are lower than our domestic plan assumptions and do not significantly affect the consolidated net benefit obligation or net periodic benefit cost balances.
Plan Assets
The weighted average asset allocations of our master defined benefit retirement plan at September 30, 2017 and 2016, by asset category, along with target allocations, are as follows:
|
| | | | | | | | |
| | | 2017 Target Allocation | | 2016 Target Allocation | | 2017 Actual Allocation | | 2016 Actual Allocation |
| | | | | | | | | |
| Equity securities | | 37% - 45% | | 39 - 49% | | 42% | | 43% |
| Fixed income securities | | 55% - 63% | | 51 - 61% | | 58% | | 57% |
| Total | | | | | | 100% | | 100% |
We have a Plan Committee that sets investment guidelines with the assistance of an external consultant. These guidelines are established based on market conditions, risk tolerance, funding requirements and expected benefit payments. The Plan Committee also oversees the investment allocation process and monitors asset performance. As pension liabilities are long-term in nature, we employ a long-term total return approach to maximize the long-term rate of return on plan assets for a prudent level of risk. Target allocations are guidelines, not limitations, and plan fiduciaries may occasionally approve allocations above or below a target range or elect to rebalance the portfolio within the targeted range.
The investment portfolio contains a diversified portfolio of primarily equities and fixed income securities. Securities are also diversified in terms of domestic and international securities, short- and long-term securities, growth and value styles, large cap and small cap stocks. The primary investment strategy is a dynamic target allocation method that periodically rebalances among various investment categories depending on the current funded positions. This program is designed to actively move from return-seeking investments (such as equities) toward liability-hedging investments (such as long-duration fixed income) as funding levels improve.
Trust assets are invested subject to the following policy restrictions: short-term securities must be rated A2/P2 or higher; all fixed-income securities shall have a credit quality rating "BBB" or higher; investments in equities in any one company may not exceed 10% of the equity portfolio.
Fair Value Measurements of Plan Assets
The following table summarizestables represent the valuation of our pension plan assets by pricing categories:
|
| | | | | | | | | | | | | | | | |
| | | Balance at September 30, 2017 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Cash | | $ | 7.2 |
| | $ | 7.2 |
| | $ | — |
| | $ | — |
|
| Equities (a) | | | | | | | | |
| U.S. companies | | 58.6 |
| | — |
| | — |
| | — |
|
| International companies | | 59.4 |
| | — |
| | — |
| | — |
|
| Fixed income securities (a) | | 159.2 |
| | — |
| | — |
| | — |
|
| Total plan assets at fair value | | $ | 284.4 |
|
| $ | 7.2 |
|
| $ | — |
|
| $ | — |
|
|
| | | | | | | | | | | | | | | | |
| | | Balance at September 30, 2016 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Cash | | $ | 3.7 |
| | $ | 3.7 |
| | $ | — |
| | $ | — |
|
| Equities (a) | | | | | | | | |
| U.S. companies | | 59.3 |
| | — |
| | — |
| | — |
|
| International companies | | 56.4 |
| | — |
| | — |
| | — |
|
| Fixed income securities (a) | | 147.6 |
| | — |
| | — |
| | — |
|
| Total plan assets at fair value | | $ | 267.0 |
|
| $ | 3.7 |
|
| $ | — |
|
| $ | — |
|
(a) These investments are commingled funds and/or collective trusts valued using the net asset value ("NAV") unit price provided by the fund administrator. The NAV is based on the value of the underlying assets owned by the fund. During fiscal 2017, we adopted revised disclosure guidance related to investments measured at NAV as a practical expedient, under which they are no longer categorizedchanges in the fair value hierarchy. For further descriptions of the asset Levels used in the above chart, refer to Note 1 of our Consolidated Financial Statements.
Cash Flows
Our U.S. qualified defined benefit plan is funded in excess of 89%, as measured under the requirements of the Pension Protection Act of 2006,Other comprehensive income (loss) and therefore we expect that the plan will not be subject to the "at risk" funding requirements of this legislation.
During 2017 and 2016, we contributed cash of $1.1 million and $31.0 million to our defined benefit retirement plans. We will not be required to contribute to our master defined benefit retirement plan for fiscal year 2018 due to the current funding level; however, minimal contributions will be required for our unfunded plans.
Estimated Future Benefit Payments
The benefit payments, which are expected to be funded through plan assets and company contributions and reflect expected future service, are expected to be paid as follows:
|
| | | |
| | Pension Benefits |
| 2018 | $ | 13.7 |
|
| 2019 | $ | 13.8 |
|
| 2020 | $ | 14.6 |
|
| 2021 | $ | 15.4 |
|
| 2022 | $ | 16.0 |
|
| 2023-2027 | $ | 91.4 |
|
Defined Contribution Savings Plans
We have defined contribution savings plans that cover substantially all U.S. employees and certain non-U.S. employees. The general purpose of these plans is to provide additional financial security during retirement by providing employees with an incentive to make regular savings. Company contributions to the plans are based on eligibility and employee contributions. Expense under these plans was $26.8 million in fiscal years 2017 and 2016. During fiscal 2015, the expense was $17.4 million.
Postretirement Health Care Plans
In addition to defined benefit retirement plans, we also offer two domestic postretirement health care plans, one of which was assumed in the acquisition of Welch Allyn, that provide health care benefits to qualified retirees and their dependents. The plans are closed to new participants and include retiree cost sharing provisions and generally extends retiree coverage for medical and prescription benefits beyond the COBRA continuation period to the date of Medicare eligibility. We use a measurement date of September 30, for these plans.
The expense related to postretirement health care plans, including the Welch Allyn plan on a post-acquisition basis, has not been significant during fiscal years 2017, 2016 or 2015. The change in the accumulated postretirement benefit obligation was as follows:
|
| | | | | | | | |
| | | Year Ended September 30 |
| | | 2017 | | 2016 |
| Change in benefit obligation: | | | | |
| Benefit obligation at beginning of year | | $ | 21.6 |
| | $ | 25.1 |
|
| Service cost | | 0.4 |
| | 0.3 |
|
| Interest cost | | 0.5 |
| | 0.8 |
|
| Plan amendments | | (0.7 | ) | | — |
|
| Actuarial gain | | (1.8 | ) | | (3.7 | ) |
| Benefits paid | | (0.9 | ) | | (1.5 | ) |
| Retiree contributions | | 0.3 |
| | 0.6 |
|
| Benefit obligation at end of year | | $ | 19.4 |
|
| $ | 21.6 |
|
| | | | | |
| Amounts recorded in the Consolidated Balance Sheets: | | |
| | |
|
| Accrued benefits obligation, current portion | | $ | 1.5 |
| | $ | 1.6 |
|
| Accrued benefits obligation, long-term | | 17.9 |
| | 20.0 |
|
| Net amount recognized | | $ | 19.4 |
|
| $ | 21.6 |
|
We contributed approximately $0.9 million to the plans in fiscal 2017, compared with $1.5 million in fiscal 2016.
In addition to the amounts above, net actuarial gains of $7.3 million and prior service credits of $1.0 million, less an applicable aggregate tax effect of $3.1 million are included as components of accumulatedAccumulated other comprehensive loss at September 30, 2017. Net actuarial gains of $5.9 million and prior service credits of $0.5 million, less an applicable aggregate tax effect of $2.4 million are included as components of accumulated other comprehensive loss at September 30, 2016.
The estimated net actuarial gain and prior service benefitincome (loss) by component for our postretirement health care plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $(0.6) million and $(0.2) million.
The discount rate used to determine the net periodic benefit cost for the postretirement health care plans during the fiscal years ended September 30, 2017, 20162020, 2019 and 2015 was 3.0%, 3.5% and 3.7%, respectively. The discount rate used to determine the benefit obligation as of September 30, 2017 was 3.3%. For fiscal year ended 2016 the discount rate ranged from 2.9% to 3.0%. For the fiscal year ended 2015 the discount rate was 3.5%. As of September 30, 2017, the health care cost trend rates for the plans were generally assumed to be in the ranges of 6.9% to 8.7%, trending down to a rate of 4.5% over the long-term.2018.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended September 30, 2020 | | |
| | Other comprehensive income (loss) | | Accumulated other comprehensive income (loss) | | |
| | Prior to
reclassification | | Reclassification
from | | Pre-tax | | Tax effect | | Net of tax | | Beginning
balance | | Net activity | | Ending balance 2 | | |
Derivative instruments designated as hedges 1: | | | | | | | | | | | | | | | | | |
| Currency exchange contracts | $ | 1.9 | | | $ | (2.6) | | | $ | (0.7) | | | $ | 0.2 | | | $ | (0.5) | | | $ | 0.2 | | | $ | (0.5) | | | $ | (0.3) | | | |
| Interest rate swaps | (35.4) | | | (4.2) | | | (39.6) | | | 9.1 | | | (30.5) | | | (5.2) | | | (30.5) | | | (35.7) | | | |
| Cross-currency swaps | (7.2) | | | 0 | | | (7.2) | | | 1.7 | | | (5.5) | | | 12.2 | | | (5.5) | | | 6.7 | | | |
| Derivative instruments designated as hedges total | $ | (40.7) | | | $ | (6.8) | | | $ | (47.5) | | | $ | 11.0 | | | $ | (36.5) | | | $ | 7.2 | | | $ | (36.5) | | | $ | (29.3) | | | |
| Foreign currency translation adjustment | 34.7 | | | 0 | | | 34.7 | | | 0 | | | 34.7 | | | (145.4) | | | 34.7 | | | (110.7) | | | |
| Change in pension and postretirement defined benefit plans | 0.9 | | | 4.6 | | | 5.5 | | | (1.4) | | | 4.1 | | | (44.3) | | | 4.1 | | | (40.2) | | | |
| Total | $ | (5.1) | | | $ | (2.2) | | | $ | (7.3) | | | $ | 9.6 | | | $ | 2.3 | | | $ | (182.5) | | | $ | 2.3 | | | $ | (180.2) | | | |
A one-percentage-point increase/decrease in the assumed health care cost trend rates as of September 30, 2017 would cause an increase/decrease in service and interest costs of less than $0.1 million, along with an increase in the benefit obligation of $1.3 million and a decrease of $1.2 million.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended September 30, 2019 |
| | Other comprehensive income (loss) | | Accumulated other comprehensive income (loss) |
| | Prior to
reclassification | | Reclassification
from | | Pre-tax | | Tax effect | | Net of tax | | Beginning
balance | | Impacts of ASU 2018-02 Adoption as of October 1, 2018 | | Net activity | | Ending balance |
Derivative instruments designated as hedges 1: | | | | | | | | | | | | | | | | | |
| Currency exchange contracts | $ | (0.6) | | | $ | 0.6 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0.2 | | | $ | — | | | $ | 0 | | | $ | 0.2 | |
| Interest rate swaps | (24.8) | | | (6.8) | | | (31.6) | | | 7.3 | | | (24.3) | | | 18.3 | | | 0.8 | | | (24.3) | | | (5.2) | |
| Cross-currency swaps | 18.0 | | | 0 | | | 18.0 | | | (4.1) | | | 13.9 | | | (1.7) | | | — | | | 13.9 | | | 12.2 | |
| Derivative instruments designated as hedges total | $ | (7.4) | | | $ | (6.2) | | | $ | (13.6) | | | $ | 3.2 | | | $ | (10.4) | | | $ | 16.8 | | | $ | 0.8 | | | $ | (10.4) | | | $ | 7.2 | |
| Foreign currency translation adjustment | (40.1) | | | 0 | | | (40.1) | | | 0 | | | (40.1) | | | (105.3) | | | — | | | (40.1) | | | (145.4) | |
| Change in pension and postretirement defined benefit plans | (19.4) | | | 2.0 | | | (17.4) | | | 3.8 | | | (13.6) | | | (24.5) | | | (6.2) | | | (13.6) | | | (44.3) | |
| Total | $ | (66.9) | | | $ | (4.2) | | | $ | (71.1) | | | $ | 7.0 | | | $ | (64.1) | | | $ | (113.0) | | | $ | (5.4) | | | $ | (64.1) | | | $ | (182.5) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, 2018 |
| | Other comprehensive income (loss) | | Accumulated other comprehensive income (loss) |
| | Prior to
reclassification | | Reclassification
from | | Pre-tax | | Tax effect | | Net of tax | | Beginning
balance | | Net activity | | Ending
balance |
Derivative instruments designated as hedges 1: | | | | | | | | | | | | | | | |
| Currency exchange contracts | $ | 0.4 | | | $ | 0.3 | | | $ | 0.7 | | | $ | (0.1) | | | $ | 0.6 | | | $ | (0.4) | | | $ | 0.6 | | | $ | 0.2 | |
| Interest rate swaps | 22.8 | | | (5.3) | | | 17.5 | | | (3.9) | | | 13.6 | | | 4.7 | | | 13.6 | | | 18.3 | |
| Cross-currency swaps | (2.2) | | | 0 | | | (2.2) | | | 0.5 | | | (1.7) | | | 0 | | | (1.7) | | | (1.7) | |
| Derivative instruments designated as hedges total | $ | 21.0 | | | $ | (5.0) | | | $ | 16.0 | | | $ | (3.5) | | | $ | 12.5 | | | $ | 4.3 | | | $ | 12.5 | | | $ | 16.8 | |
| Foreign currency translation adjustment | (24.0) | | | 0 | | | (24.0) | | | 0 | | | (24.0) | | | (81.3) | | | (24.0) | | | (105.3) | |
| Change in pension and postretirement defined benefit plans | 7.9 | | | 3.0 | | | 10.9 | | | (2.4) | | | 8.5 | | | (33.0) | | | 8.5 | | | (24.5) | |
| Total | $ | 4.9 | | | $ | (2.0) | | | $ | 2.9 | | | $ | (5.9) | | | $ | (3.0) | | | $ | (110.0) | | | $ | (3.0) | | | $ | (113.0) | |
1 See Note 6. Derivative Instruments and Hedging Activity for information regarding our hedging strategies |
2 The estimated net amount of gains and losses reported in Accumulated other comprehensive income (loss) related to our derivative instruments designated as hedges as of September 30, 2020 that are expected to be reclassified into earnings within the next 12 months is expense of $7.5 million. |
We fund the postretirement health care plans as benefits are paid, and current plan benefits are expected to require net company contributions of approximately $1.6 million in fiscal 2017 and approximately $2.0 million per fiscal year thereafter.
Note 7. Common Stock
Share Repurchases
As part of the $190.0 million share repurchase program approved by the Board of Directors in September 2013, we repurchased 0.8 million shares of our common stock in the open market during fiscal year 2017 valued at $50.0 million. We did not repurchase shares in fiscal year 2016 in the open market. We repurchased 1.2 million shares of our common stock in the open market during fiscal year 2015 valued at $54.8 million. As of September 30, 2017, a cumulative total of $175.3 million had been used under the then existing authorization. Repurchases may be made on the open market or via private transactions, and are used for general business purposes. On November 6, 2017, the Board of Directors approved an increase to the share repurchase program in an amount of $150.0 million, leaving the company approximately $165.0 million of availability under the share repurchase program as of such date. This program does not have an expiration date and there are no plans to terminate this program in the future.
Stock-Based Compensation
We have stock-based compensation plans under which employees and non-employee directors may be granted options to purchase shares of Company common stock at the fair market value at the time of grant. In addition to stock options, we grant performance share units ("PSUs") and RSUs to certain management level employees and vested deferred stock to non-employee directors. We also offer eligible employees the opportunity to buy shares of our common stock at a discount via an Employee Stock Purchase Plan ("ESPP").
Our primary stock-based compensation program is the Stock Incentive Plan, which has been approved by our shareholders. Under the Stock Incentive Plan, we have a total of 15.3 million authorized shares. As of September 30, 2017, approximately 3.0 million shares were available for future grants under our stock-based compensation plans. We generally settle our stock-based awards with treasury shares. As of September 30, 2017, we had 22.6 million treasury shares available for use to settle stock-based awards.
The following table sets forth a summaryrepresents the items reclassified out of Accumulated other comprehensive income (loss) and the annual stock-based compensation cost that was charged against income for all types of awards:
|
| | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2017 | | 2016 | | 2015 |
| Total stock-based compensation cost (pre-tax) | | $ | 23.0 |
| | $ | 23.1 |
| | $ | 25.0 |
|
| Total income tax benefit | | (16.5 | ) | | (7.9 | ) | | (7.5 | ) |
| Total stock-based compensation cost, net of tax | | $ | 6.5 |
|
| $ | 15.2 |
|
| $ | 17.5 |
|
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, Compensation – Stock Compensation (Topic 718), "Improvements to Employee Share-Based Payment Accounting." During the first quarter of fiscal 2017, we elected to early adopt ASU 2016-09, as permitted. Under ASU 2016-09, therelated tax effects of stock compensation will be recognized as income tax expense or benefit infor the income statement and the tax effects of exercised or vested awards will be treated as discrete items in the reporting period in which they occur. Amendments related to accounting for excess tax benefits have been adopted prospectively, resulting in recognition of excess tax benefits against income tax expense rather than additional paid-in capital of $8.9 million in the yearfiscal years ended September 30, 2017. 2020, 2019 and 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30 |
| | 2020 | | 2019 | | 2018 |
| | Amount
reclassified | | Tax effect | | Net of tax | | Amount
reclassified | | Tax effect 4 | | Net of tax | | Amount
reclassified | | Tax effect | | Net of tax |
| Derivative instruments designated as hedges: | | | | | | | | | | | | | | | | | |
Currency exchange contracts 1 | $ | (2.6) | | | $ | 0.5 | | | $ | (2.1) | | | $ | 0.6 | | | $ | (0.2) | | | $ | 0.4 | | | $ | 0.3 | | | $ | 0 | | | $ | 0.3 | |
Interest rate swaps 2 | (4.2) | | | 1.0 | | | (3.2) | | | (6.8) | | | 1.6 | | | (5.2) | | | (5.3) | | | 1.2 | | | (4.1) | |
| Derivative instruments designated as hedges total | $ | (6.8) | | | $ | 1.5 | | | $ | (5.3) | | | $ | (6.2) | | | $ | 1.4 | | | $ | (4.8) | | | $ | (5.0) | | | $ | 1.2 | | | (3.8) | |
| | | | | | | | | | | | | | | | | |
Change in pension and postretirement defined benefit plans 3 | $ | 4.6 | | | $ | (1.4) | | | $ | 3.2 | | | $ | 2.0 | | | $ | (2.4) | | | $ | (0.4) | | | $ | 3.0 | | | $ | (1.0) | | | $ | 2.0 | |
1 Reclassified from Accumulated other comprehensive income (loss) into Investment income (expense) and other, net.
2 Reclassified from Accumulated other comprehensive income (loss) into Interest expense.
3 Reclassified from Accumulated other comprehensive income (loss) into Cost of goods sold and Investment income (expense) and other, net. These components are included in the computation of net periodic pension expense.
4 As a result of the adoption of ASU 2018-02, we did not record an adjustmentreclassified $5.4 million from Accumulated other comprehensive income (loss) to retained earnings as we did not have net operating loss carryforwards attributable to excess tax benefits on stock compensation that had not been previously recognized to additional paid-in capital. Excess tax benefits for share-based payments are now included as net operating activities rather than net financing activities in the Statements of Consolidated Cash Flows. The changes have been applied prospectively in accordance with the ASU and prior periods have not been adjusted. Cash paid by an employer when directly withholding shares for tax withholding purposes will continue to be classified as financing activities. We elected not to change our accounting policy for forfeitures. The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions.Retained earnings.
Stock Options
Stock options granted by our Compensation Committee of our Board under the Stock Incentive Plan are non-qualified stock options. These awards are generally granted with exercise prices equal to the average of the high and low prices of our common stock on the date of grant. They vest in equal annual installments over a three or four-year period and the maximum contractual term is ten years. We use a Binomial option-pricing model to estimate the fair value of stock options, and compensation cost is recognized on a straight-line basis over the requisite service period.
The following table sets forth the weighted average fair value per share of stock options and the related valuation assumptions used in the determination of those fair values:
|
| | | | | | |
| | | Year Ended September 30 |
| | | 2017 | | 2016 | | 2015 |
| Weighted average fair value per share | | $15.05 | | $14.07 | | $12.83 |
| | | | | | | |
| Valuation assumptions: | | | | | | |
| Risk-free interest rate | | 1.7% | | 1.6% | | 1.6% |
| Expected dividend yield | | 1.3% | | 1.2% | | 1.4% |
| Expected volatility | | 33.2% | | 33.1% | | 35.0% |
| Weighted average expected life (years) | | 4.9 | | 4.9 | | 4.9 |
The risk-free interest rate is based upon observed U.S. Treasury interest rates appropriate for the term of our employee stock options. Expected dividend yield is based on the history and our expectation of dividend payouts. Expected volatility was based on our historical stock price volatility. Expected life represents the weighted average period the stock options are expected to remain outstanding and is a derived output of the Binomial model. The expected life of employee stock options is impacted by the above assumptions as well as the post-vesting forfeiture rate and the exercise factor used in the Binomial model. These two variables are based on the history of exercises and forfeitures for previous stock options granted by us.
The following table summarizes transactions under our stock option plans for fiscal year 2017:
|
| | | | | | | | | | | | | |
| | | Weighted
Average
Number of
Shares
(in thousands) | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic
Value (1)
(in millions) |
| Balance Outstanding at October 1, 2016 | | 2,006 |
| | $ | 37.31 |
| | | | |
| Granted | | 353 |
| | 53.81 |
| | | | |
| Exercised | | (556 | ) | | 31.94 |
| | | | |
| Cancelled/Forfeited | | (98 | ) | | 49.28 |
| | | | |
| Balance Outstanding at September 30, 2017 | | 1,705 |
| | $ | 41.79 |
| | 6.2 | | $ | 54.9 |
|
| Exercisable at September 30, 2017 | | 981 |
| | $ | 35.29 |
| | 4.6 | | $ | 38.0 |
|
| Options Expected to Vest | | 623 |
| | $ | 50.36 |
| | 8.2 | | $ | 14.7 |
|
| |
(1) | The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $74.00, as reported by the New York Stock Exchange on September 30, 2017. This amount, which changes continuously based on the fair value of our common stock, would have been received by the option holders had all option holders exercised their options as of the balance sheet date. |
The total intrinsic value of options exercised during fiscal years 2017, 2016 and 2015 was $19.4 million, $4.0 million and $6.3 million, respectively.
As of September 30, 2017, there was $5.2 million of unrecognized compensation expense related to stock options granted under the Stock Incentive Plan. This unrecognized compensation expense does not reflect a reduction for our estimate of potential forfeitures, and is expected to be recognized over a weighted average period of 2.1 years.
Restricted Stock Units
RSUs are granted to certain employees with fair values equal to the average of the high and low prices of our common stock on the date of grant, multiplied by the number of units granted. RSU grants are contingent upon continued employment and vest over periods ranging from one to four years. Dividends, payable in common stock equivalents, accrue on the grants and are subject to the same specified terms as the original grants, including the risk of forfeiture.
The following table summarizes transactions for our nonvested RSUs for fiscal year 2017:
|
| | | | | | |
| | | Number of Share Units (in thousands) | | Weighted Average Grant Date Fair Value |
| Nonvested RSUs at October 1, 2016 | | 556 | | $ | 46.32 |
|
| Granted | | 255 | | 57.47 |
|
| Vested | | (241) | | 45.86 |
|
| Forfeited | | (49) | | 49.14 |
|
| Nonvested RSUs at September 30, 2017 | | 521 | | $ | 51.39 |
|
As of September 30, 2017, there was $12.3 million of total unrecognized compensation expense related to nonvested RSUs granted under the Stock Incentive Plan. This unrecognized compensation expense does not reflect a reduction for our estimate of potential forfeitures, and is expected to be recognized over a weighted average period of 2 years. The total vest date fair value of shares that vested during fiscal years 2017, 2016 and 2015 was $14.5 million, $14.4 million and $4.3 million, respectively.
Performance Share Units
Our Compensation Committee grants PSUs to certain employees and these awards are subject to any stock dividends, stock splits, and other similar rights inuring to common stock, but unlike our RSUs are not entitled to dividend reinvestment. Vesting of the grants is contingent upon achievement of performance targets and corresponding service requirements.
The fair value of the PSUs is equal to the average of the high and low prices of our common stock on the date of grant, multiplied by the number of units granted. For PSUs with a market condition such as total shareholder return, the Monte-Carlo simulation method is used to determine fair value. The Monte-Carlo simulation is a generally accepted statistical technique used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of our and the Peer Group’s future expected stock prices.
The following table sets forth the weighted average fair value per share for PSUs and the related valuation assumptions used in the determination of those fair values. PSUs granted in fiscal 2017, 2016 and 2015 are based on company-specific performance targets, with a total shareholder return collar.
|
| | | | | | |
| | | Year Ended September 30 |
| | | 2017 | | 2016 | | 2015 |
| Weighted average fair value per share | | $55.95 | | $50.51 | | $47.82 |
| | | | | | | |
| Valuation assumptions: | | | | | | |
| Risk-free interest rate | | 1.2% | | 1.1% | | 0.9% |
| Expected dividend yield | | 0.0% | | 0.0% | | 0.0% |
| Expected volatility | | 22.6% | | 22.3% | | 23.5% |
The basis for the assumptions listed above is similar to the valuation assumptions used for stock options, as discussed previously.
The following table summarizes transactions for our nonvested PSUs for fiscal 2017:
|
| | | | | | |
| | | Number of Share Units (in thousands) | | Weighted Average Grant Date Fair Value |
| Nonvested PSUs as of October 1, 2016 | | 455 | | $ | 49.50 |
|
| Granted | | 143 | | 55.95 |
|
| Vested | | (196) | | 48.46 |
|
| Forfeited | | (57) | | 49.92 |
|
| Nonvested PSUs at September 30, 2017 | | 345 | | $ | 53.40 |
|
As of September 30, 2017, there was $14.0 million of unrecognized compensation expense related to PSUs granted under the Stock Incentive Plan based on the expected achievement of certain performance targets or market conditions. This unrecognized compensation expense as of September 30, 2017 does not reflect a reduction for our estimate of potential forfeitures, and is expected to be recognized by the end of fiscal 2019. The total vest date fair value of shares that vested during fiscal 2017, 2016 and 2015 was $14.2 million, $10.2 million and $20.5 million.
Note 8.10. Special Charges
InSpecial charges are incurred in connection with various transformative initiatives, restructuring and exit activities, and organizational changes to improve our business alignment and cost structure, as well as legal settlements, we recognized special charges of $37.4 million, $39.9 million and $41.2 million for the year to date periods ended September 30, 2017, 2016 and 2015. Thesestructure. Although these charges are summarized as follows:
Dispositions
During the fourth quarter of fiscal 2017, we sold our Völker business. We recorded impairmentinfrequent and unusual in nature, additional Special charges of $25.4 million during the third quarter, relating mainly to non-cash write-downs of long-lived assets and working capital associated with the Völker brand portfolio, and fiscal 2017 transaction related costs of approximately $3.0 million in Special charges.
During the first quarter of fiscal 2017, we sold our Architectural Products business and recorded special charges of $1.1 million, primarily related to severance.
Legal Settlements
During the fourth quarter of fiscal 2017, we entered into a confidential agreement with Stryker Corporation, resolving alleged infringement of certain Hill-Rom patents covering proprietary communications networks whereby Stryker Corporation paid the Company $15.1 million.
Integration and Business Realignment
We recently acquired Mortara and Tridien and initiated integration activities to optimize the available synergies of our combined company. Additionally, with the acquisition of Welch Allyn in September 2015, we initiated plans to realign our business structure to facilitate the integration, take full advantage of available synergies, and position our existing businesses to capitalize on opportunities for growth. We also incurred costs, including severance and benefit costs, associated with other business realignment and integration activities. During the year ended September 30, 2017, we incurred total integration and business realignment charges of approximately $7.6 million, of which $3.5 million were severance and benefit costs. These amounts compare to charges of $19.0 million, of which $14.0 million were severance and benefit costs during the year ended September 30, 2016. Additionally, we recorded special charges of $14.4 million in the fourth quarter of fiscal 2015 related to the acquisition of Welch Allyn. We continue to evaluate additional actions related to integration and business realignment and expect additional special chargesare expected to be incurred. However, itIt is not practicable to estimate the amount of these future expected costs until such time as the evaluations are complete. The following table summarizes the Special charges recognized for the fiscal years ended September 30, 2020, 2019 and 2018.
| | | | | | | | | | | | | | | | | | | | |
| Special charges | | Year Ended September 30 |
| 2020 | | 2019 | | 2018 |
| Global information technology transformation | | $ | 15.9 | | | $ | 1.3 | | | $ | — | |
| Workforce reduction plan | | 6.7 | | | — | | | — | |
| Integration-related activities | | 13.1 | | | $ | 19.8 | | | $ | 38.4 | |
| Site consolidation and other cost optimization activities, including related severance cost | | 5.8 | | | 7.3 | | | 15.9 | |
| Disposition | | — | | | — | | | 24.5 | |
| Legal claim recovery | | — | | | — | | | (1.2) | |
| Total Special charges | | $ | 41.5 | | | $ | 28.4 | | | $ | 77.6 | |
Global Information Technology Transformation
In fiscal 2019, management initiated a global information technology transformation, including rationalizing and transforming our enterprise resource planning software solutions and other complementary information technology systems. In addition to the expenses noted in the table above, $22.0 million and $2.0 million was capitalized as software in Other intangible assets and software, net for the fiscal years ended September 30, 2020 and 2019, respectively.
The objective of this initiative is to consolidate and streamline our key workstreams that interact with customers and vendors and support our financial reporting processes while maintaining the security of our data. The solutions designed under this initiative will be implemented over the next five to seven years.
Workforce Reduction Plan
On September 15, 2020, we committed to a workforce reduction plan as part of the continued business optimization initiatives to advance our strategy and growth platforms and improve our operations and cost structure. The workforce reduction plan includes a voluntary retirement program and involuntary severance actions. For the fiscal year ended September 30, 2020, we have incurred $6.7 million related to this initiative within Special charges. We expect substantially all costs related to the execution of the workforce reduction plan to be incurred in fiscal year ended 2021, which will bring the aggregated total cost to approximately $35 million.
Integration-Related Activities
We incurred costs, including severance and benefit costs, associated with business realignment and integration activities focused on reducing complexity, increasing efficiency, and improving our cost structure. We acquired several businesses in the fiscal years ended September 30, 2020 and 2019 as disclosed within Note 3. Business Combinations for which we also continue to incur integration-related costs and severance costs.
Site Consolidation and Other Cost Optimization Activities, Including Related Severance Cost
In the third quarter of fiscal 2015, we initiated a plan
We continue to streamline our operations and simplify our supply chain by transforming and consolidating certain manufacturing and distribution operations ("Site Consolidation"). As part of this action, we have announced the closure of five sites. During the year ended September 30, 2017,operations.
Dispositions
In fiscal 2018, we recorded total chargesa loss of $19.7$24.5 million related to these efforts, of which $5.1 million were severance and benefit costs. During fiscal 2016, we recorded totalin Special charges related to the combined activities of $15.9 million related to these actions, including $7.2 million of severance and benefit costs. DuringUHS Settlement Agreement.
Legal Claim Recovery
In fiscal 2015,2018, we recorded severance and benefit charges of $2.7 million, as well as $1.8 million of other related costs.
During the second quarter of fiscal 2017, we sold our Charleston propertyreceived a settlement payment for $6.1 million in cash proceedsa legal claim and recorded a gain of $5.2 million.$1.2 million in Special charges.
Since the inception of the Site Consolidation program through September 30, 2017, we have recognized aggregate special charges of $34.9 million. We continue to evaluate our facilities footprint and expect to incur additional costs with respect to other actions in the future, however, it is not practicable to estimate the amount of these future expected costs until such time as the evaluations are complete.
2014 Global Transformation
During the second quarter of fiscal 2014, we announced a global transformation program focused on improving our cost structure. The domestic portion of this action was completed in fiscal 2015. Part of this program included reducing our European manufacturing capacity and streamlining our global operations by, among other things, executing a back office process transformation program in Europe. The restructuring in Europe is complete and, for the year to date period ended September 30,
2017, resulted in charges of $0.9 million for legal and professional fees, temporary labor, project management, severance and benefit costs, and other administrative functions. These amounts compare to charges of $5.1 million and $12.7 million (net of reversals) in the prior year to date periods ended 2016 and 2015. Since the inception of the 2014 global transformation program through September 30, 2017, we have recognized aggregate special charges of $43.6 million. We do not expect to incur further costs related to this action.
Pension Settlement Charge
As disclosed in Note 6 of our Consolidated Financial Statements, we offered lump sum settlements to all terminated vested participants in our domestic master defined benefit retirement plan, which resulted in a settlement charge of $9.6 million. This charge was recorded as a component of special charges in fiscal 2015.
For all accrued severance and other benefit charges described above, we record restructuring reserves within otherOther current liabilities. The following table summarizes the reserve activity for severance and other benefits duringfor the year to date periodfiscal years ended September 30, 2017 was as follows:2020 and 2019:
|
| | | |
| Balance at September 30, 2016 | $ | 14.7 |
|
| Expenses | 9.7 |
|
| Cash Payments | (14.3 | ) |
| Reversals | (1.1 | ) |
| Balance at September 30, 2017 | $ | 9.0 |
|
| | | | | |
| Balance as of September 30, 2018 | $ | 8.5 | |
| Expenses | 16.4 | |
| Cash Payments | (15.1) | |
| Reversals | (1.3) | |
| Balance as of September 30, 2019 | $ | 8.5 | |
| Expenses | 14.6 | |
| Cash Payments | (11.1) | |
| Reversals | (0.7) | |
| Balance as of September 30, 2020 | $ | 11.3 | |
Note 9.11. Income Taxes
The significant components of income before income taxes and the consolidated income tax provision were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2020 | | 2019 | | 2018 |
| Income before income taxes: | | | | | | |
| Domestic | | $ | 137.0 | | | $ | 122.5 | | | $ | 101.8 | |
| Foreign | | 134.2 | | | 86.1 | | | 95.4 | |
| Total | | $ | 271.2 | | | $ | 208.6 | | | $ | 197.2 | |
|
| | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2017 | | 2016 | | 2015 |
| Income before income taxes: | | | | | | |
| Domestic | | $ | 129.0 |
| | $ | 92.2 |
| | $ | 49.2 |
|
| Foreign | | 54.0 |
| | 46.1 |
| | 15.9 |
|
| Total | | $ | 183.0 |
|
| $ | 138.3 |
|
| $ | 65.1 |
|
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Income tax expense: | | | | | | |
| Current provision | | | | | | |
| U.S. Federal | | $ | 38.1 | | | $ | 51.0 | | | $ | 5.9 | |
| State | | 10.8 | | | 6.0 | | | 3.5 | |
| Foreign | | 18.3 | | | 18.2 | | | 20.2 | |
| Total current provision | | 67.2 | | | 75.2 | | | 29.6 | |
| Deferred provision: | | | | | | |
| U.S. Federal | | (15.6) | | | (12.0) | | | (83.4) | |
| State | | (2.8) | | | (2.5) | | | (2.8) | |
| Foreign | | (0.6) | | | (4.3) | | | 1.4 | |
| Total deferred provision | | (19.0) | | | (18.8) | | | (84.8) | |
| Income tax expense | | $ | 48.2 | | | $ | 56.4 | | | $ | (55.2) | |
|
| | | | | | | | | | | | |
| Income tax expense: | | |
| | |
| | |
|
| Current provision | | |
| | |
| | |
|
| Federal | | $ | 61.6 |
| | $ | 4.7 |
| | $ | 35.3 |
|
| State | | 8.6 |
| | 2.2 |
| | 3.6 |
|
| Foreign | | 13.3 |
| | 9.1 |
| | 1.7 |
|
| Total current provision | | 83.5 |
| | 16.0 |
| | 40.6 |
|
| Deferred provision: | | |
| | |
| | |
|
| Federal | | (34.9 | ) | | 21.8 |
| | (18.1 | ) |
| State | | 1.3 |
| | 1.2 |
| | (1.3 | ) |
| Foreign | | 0.8 |
| | (23.5 | ) | | (2.9 | ) |
| Total deferred provision | | (32.8 | ) | | (0.5 | ) | | (22.3 | ) |
| Income tax expense | | $ | 50.7 |
| | $ | 15.5 |
| | $ | 18.3 |
|
85
Differences between income tax expense reported for financial reporting purposes and that computed based upon the application of the statutory U.S. Federal tax rate to the reported income before income taxes were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2020 | | 2019 | | 2018 |
| | Amount | | % of
Pretax
Income | | Amount | | % of
Pretax
Income | | Amount | | % of
Pretax
Income |
U.S. Federal income tax 1 | | $ | 57.0 | | | 21.0 | % | | $ | 43.8 | | | 21.0 | % | | $ | 48.4 | | | 24.5 | % |
State income tax 2 | | 4.1 | | | 1.5 | | | 3.3 | | | 1.6 | | | 2.9 | | | 1.5 | |
Foreign income tax 3 | | (15.0) | | | (5.5) | | | (10.1) | | | (4.9) | | | (25.9) | | | (13.2) | |
| Application of federal research tax credits | | (6.2) | | | (2.3) | | | (5.6) | | | (2.7) | | | (5.6) | | | (2.9) | |
| Application of foreign tax credits | | (11.6) | | | (4.3) | | | (0.1) | | | 0 | | | (1.0) | | | (0.5) | |
| | | | | | | | | | | | |
| Valuation of tax attributes | | 5.0 | | | 1.9 | | | 2.2 | | | 1.1 | | | 23.4 | | | 11.9 | |
| Foreign inclusions | | 7.7 | | | 2.9 | | | 0 | | | 0 | | | (0.9) | | | (0.4) | |
| Domestic manufacturer’s deduction | | 0 | | | 0 | | | 0 | | | 0 | | | (0.9) | | | (0.4) | |
| Excess tax benefits from share based awards | | (4.7) | | | (1.7) | | | (5.2) | | | (2.5) | | | (16.1) | | | (8.2) | |
| U.S. tax benefit of foreign currency loss | | 0 | | | 0 | | | 0 | | | 0 | | | (9.2) | | | (4.7) | |
| U.S. tax reform deferred tax remeasurement | | 0 | | | 0 | | | 0 | | | 0 | | | (93.8) | | | (47.6) | |
| U.S. tax reform transition tax | | 0 | | | 0 | | | (1.0) | | | (0.5) | | | 22.9 | | | 11.6 | |
| Foreign-derived intangible income deduction | | (7.8) | | | (2.9) | | | (4.3) | | | (2.0) | | | 0 | | | 0 | |
| Global intangible low-taxed income inclusion | | 12.6 | | | 4.6 | | | 9.6 | | | 4.6 | | | 0 | | | 0 | |
| Disposition of subsidiary | | 4.1 | | | 1.5 | | | 18.2 | | | 8.7 | | | 0 | | | 0 | |
| Current period change in uncertain tax positions | | 0 | | | 0 | | | 4.6 | | | 2.2 | | | 1.5 | | | 0.8 | |
| Other, net | | 3.0 | | | 1.1 | | | 1.0 | | | 0.4 | | | (0.9) | | | (0.4) | |
| Income tax expense | | $ | 48.2 | | | 17.8 | % | | $ | 56.4 | | | 27.0 | % | | $ | (55.2) | | | (28.0) | % |
1 At statutory rate.
2 Net of U.S. Federal benefit.
3 U.S. Federal tax rate differential.
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2017 | | 2016 | | 2015 |
| | | Amount | | % of Pretax Income | | Amount | | % of Pretax Income | | Amount | | % of Pretax Income |
Federal income tax (a) | | $ | 64.1 |
| | 35.0 | % | | $ | 48.4 |
| | 35.0 | % | | $ | 22.8 |
| | 35.0 | % |
State income tax (b) | | 4.1 |
| | 2.2 | % | | 2.9 |
| | 2.1 | % | | 1.6 |
| | 2.4 | % |
Foreign income tax (c) | | (35.6 | ) | | (19.4 | )% | | (14.0 | ) | | (10.1 | )% | | (10.2 | ) | | (15.7 | )% |
| Application of federal research tax credits | | (3.6 | ) | | (2.0 | )% | | (5.6 | ) | | (4.0 | )% | | (2.2 | ) | | (3.4 | )% |
| Application of foreign tax credits | | (15.0 | ) | | (8.2 | )% | | (0.5 | ) | | (0.4 | )% | | (0.2 | ) | | (0.3 | )% |
| Adjustment of estimated income tax accruals | | (0.8 | ) | | (0.4 | )% | | 0.3 |
| | 0.2 | % | | (1.6 | ) | | (2.4 | )% |
| Valuation of tax attributes | | 36.3 |
| | 19.8 | % | | (14.4 | ) | | (10.4 | )% | | 4.0 |
| | 6.2 | % |
| Foreign Inclusions | | 11.5 |
| | 6.3 | % | | 0.9 |
| | 0.6 | % | | 0.3 |
| | 0.5 | % |
| Domestic manufacturer's deduction | | (4.4 | ) | | (2.4 | )% | | (1.8 | ) | | (1.3 | )% | | (1.5 | ) | | (2.3 | )% |
| Excess tax benefits from share based awards | | (8.9 | ) | | (4.9 | )% | | — |
| | — | % | | — |
| | — | % |
| Capitalized transaction costs | | — |
| | — | % | | — |
| | — | % | | 2.5 |
| | 3.8 | % |
| Other, net | | 3.0 |
| | 1.7 | % | | (0.7 | ) | | (0.5 | )% | | 2.8 |
| | 4.3 | % |
| Income tax expense | | $ | 50.7 |
|
| 27.7 | % |
| $ | 15.5 |
|
| 11.2 | % |
| $ | 18.3 |
|
| 28.1 | % |
| |
(b) | Net of Federal benefit. |
| |
(c) | Federal tax rate differential. |
The tax effect of temporary differences that gave rise to the deferred tax balance sheet accountsassets and liabilities were as follows:
| | | | | | | | | | | | | | |
| | | September 30, 2020 | | September 30, 2019 |
| Deferred tax assets: | | | | |
| Employee benefit accruals | | $ | 48.3 | | | $ | 42.9 | |
| Inventory | | 14.7 | | | 10.0 | |
| Net operating loss carryforwards | | 69.7 | | | 69.8 | |
| Tax credit carryforwards | | 26.4 | | | 22.6 | |
| Lease liabilities | | 18.8 | | | — | |
| Other, net | | 36.2 | | | 25.3 | |
| | | 214.1 | | | 170.6 | |
| Less: Valuation allowance | | (50.8) | | | (45.0) | |
| Total deferred tax assets | | 163.3 | | | 125.6 | |
| | | | |
| Deferred tax liabilities: | | | | |
| Depreciation | | (19.2) | | | (14.5) | |
| Amortization | | (201.0) | | | (215.4) | |
| Lease Assets | | (17.6) | | | 0 | |
| Other, net | | (5.6) | | | (5.6) | |
| Total deferred tax liabilities | | (243.4) | | | (235.5) | |
| Deferred tax liability - net | | $ | (80.1) | | | $ | (109.9) | |
|
| | | | | | | | |
| | | Year Ended September 30 |
| | | 2017 | | 2016 |
| Deferred tax assets: | | | | |
| Employee benefit accruals | | $ | 64.5 |
| | $ | 76.5 |
|
| Inventory | | 16.6 |
| | 13.9 |
|
| Net operating loss carryforwards | | 70.7 |
| | 47.1 |
|
| Tax credit carryforwards | | 23.3 |
| | 14.2 |
|
| Other, net | | 41.4 |
| | 46.4 |
|
| | | 216.5 |
|
| 198.1 |
|
| Less: Valuation allowance | | (58.2 | ) | | (26.9 | ) |
| Total deferred tax assets | | 158.3 |
|
| 171.2 |
|
| | | | | |
| Deferred tax liabilities: | | |
| | |
|
| Depreciation | | (28.6 | ) | | (41.6 | ) |
| Amortization | | (349.7 | ) | | (371.2 | ) |
| Other, net | | (5.3 | ) | | (3.1 | ) |
| Total deferred tax liabilities | | (383.6 | ) |
| (415.9 | ) |
| Deferred tax asset (liability) - net | | $ | (225.3 | ) |
| $ | (244.7 | ) |
AtAs of September 30, 2017,2020, we had $68.6$40.5 million of deferred tax assets related to operating loss carryforwards in foreign jurisdictions that are subject to various carryforward periods with the majority eligible to be carried forward for an unlimited period. Additionally, we had $1.8$21.6 million of deferred tax assets related to federalU.S. Federal net operating loss (“NOL”) carryforwards, some of which will be carried forward for an unlimited period and some of which will expire between 20192021 and 20332036 and $0.3$7.6 million of deferred tax assets related to state net operating lossNOL carryforwards, some of which will be carried forward for an unlimited period and some of which expire between 20182021 and 2035.2040. We had $15.0$23.9 million of deferred tax assets related to state tax credits, some of which will be carried forward for an unlimited
period and some of which will expire between 20182021 and 2031. Additionally, we2030. We had $8.3 million of deferred tax assets related to foreign tax credits, which will expire between 2026 and 2027.We had $3.8$1.1 million of deferred tax assets related to capital loss carryforwards which will expire in 2021.2025. We had $2.1 million of deferred tax assets related to foreign tax credit carryforwards which will expire in 2030. We are considering carryback opportunities for the capital loss carryforward and the foreign tax credit carryforward.
The gross deferred tax assets as of September 30, 20172020 were reduced by valuation allowances of $58.2$50.8 million primarily related to certain foreign deferred tax attributes and state tax credit carryforwards as it is more likely than not that some portion or all of these tax attributes will not be realized. In evaluating whether it is more likely than not that we would recover our deferred tax assets, future taxable income, the reversal of existing temporary differences and tax planning strategies were considered. We believe that our estimates for the valuation allowances recorded against deferred tax assets are appropriate based on current facts and circumstances. In connection with our integration of recent acquisitions, in 2017During the Company completed a restructuringfiscal year ended September 30, 2020, the valuation allowance increased by $5.8 million. The increase related primarily to further align its capitalforeign net operating losses and debt structure. As a result, non-US NOLs were generated for which a full valuation allowance was recorded. This was the primary driver of the increase in the valuation allowance from the prior year end. state tax credits that more likely that not will not be realized.
We operate under tax holidays in both Singapore and Puerto Rico. The Singapore tax holiday is effective through 2018 while the2024. The Puerto Rico tax holiday is effective through 2025.2025, but we have disposed of this operation in fiscal 2019 and thus will not recognize any benefit in the future. Both incentives are conditional on meeting certain employment and/or investment thresholds. The impact of these tax holidays decreased foreign taxes by $3.6 million in fiscal 2017, $4.1$3.3 million for the fiscal 2016year ended September 30, 2020, $5.2 million for the fiscal year ended September 30, 2019 and $4.3 million forin the fiscal 2015.year ended September 30, 2018. The benefit of the tax holidays on net income per diluted share (diluted) was $0.05, $0.08 and $0.06 in fiscal 2020, 2019 and $0.07 for fiscal 2017, 2016 and 2015, respectively.2018.
With regard to our non-U.S. subsidiaries, it is our practice and intention to reinvest the earnings in those businesses, to fund capital expenditures and other operating cash needs. Because the undistributed earnings of non-U.S. subsidiaries are considered to be permanently reinvested, no U.S. deferred income taxes or foreign withholding taxes have been provided.provided on earnings subsequent to the enactment of the Tax Act. As of September 30, 2017,2020, we have approximately $335.9$37.3 million of undistributedundistributed earnings in our non-U.S. subsidiaries that are considered to be permanently reinvested. If such earnings were repatriated, we do not anticipate incurring a significant amount of additional tax expense may result. It is not practicable to estimate the amountexpense.
We file a consolidated federal income tax return as well as multiple state, local and foreign jurisdiction tax returns. In the normal course of business, we are subject to examination by the taxing authorities in each of the jurisdictions where we file tax returns. DuringIn fiscal 2017,2020, the U.S. Internal Revenue Service ("IRS"(“IRS”) concluded its audit forof fiscal year 20152018 and initiated its post-filing examination of the fiscal 20162019 consolidated federal return. We continue to participate in the IRS Compliance Assurance Program ("CAP"(“CAP”) for fiscal year 20172020 and 2018 and have submittedfiscal 2021. We are in the application process to remain in the CAP for fiscal year 2019.2022. The CAP provides the opportunity for the IRS to review certain tax matters prior to us filing our tax return for the year, thereby reducing the time it takes to complete the post-filing examination. We are also subject to state and local or foreign income tax examinations by taxing authorities for years back to fiscal 2013.2015.
We also have on-going audits in various stages of completion in several state and foreign jurisdictions, one or more of which may conclude within the next 12 months. Such settlements could involve some or all of the following: the payment of additional taxes and related penalties, the adjustment of certain deferred taxes and/or the recognition of unrecognized tax benefits. The resolution of these matters, in combination with the expiration of certain statutes of limitations in various jurisdictions, make it reasonably possible that our unrecognized tax benefits may decrease as a result of either payment or recognition by approximately $0.5 millionup to $1.0$1.8 million in the next twelve12 months, excluding interest.
The total amount of gross unrecognized tax benefits as of September 30, 2017, 20162020, 2019 and 2015 was $4.52018 were $3.9 million, $5.1$9.6 million and $5.8$6.2 million, which includes $3.3$3.5 million, $3.6$9.3 million and $3.3$5.6 million that, if recognized, would impact the effective tax rate in future periods. The remaining amount relates to items which, if recognized, would not impact our effective taxtax rate.
A reconciliationrollforward of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2020 | | 2019 | | 2018 |
| Balance as of October 1 | | $ | 9.6 | | | $ | 6.2 | | | $ | 4.5 | |
| Increases in tax position of prior years | | 0 | | | 5.8 | | | 2.3 | |
| Increases in tax position during the current year | | 0 | | | 0 | | | 0.3 | |
| Settlements with taxing authorities | | (5.8) | | | (1.1) | | | 0 | |
| Lapse of applicable statute of limitations | | (0.2) | | | (1.0) | | | (0.9) | |
| Foreign currency adjustments | | 0.3 | | | (0.3) | | | 0 | |
| Total change | | (5.7) | | | 3.4 | | | 1.7 | |
| Balance as of September 30 | | $ | 3.9 | | | $ | 9.6 | | | $ | 6.2 | |
|
| | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2017 | | 2016 | | 2015 |
| Balance at October 1 | | 5.1 |
| | 5.8 |
| | 4.1 |
|
| Increases in tax position of prior years | | 0.1 |
| | 0.8 |
| | 0.4 |
|
| Decreases in tax position of prior years | | — |
| | (0.1 | ) | | (1.3 | ) |
| Settlements with taxing authorities | | — |
| | (0.3 | ) | | (1.2 | ) |
| Lapse of applicable statute of limitations | | (0.8 | ) | | (0.5 | ) | | (1.3 | ) |
| Change in positions due to acquisitions | | — |
| | (0.6 | ) | | 5.5 |
|
| Foreign currency adjustments | | 0.1 |
| | — |
| | (0.4 | ) |
| Total change | | (0.6 | ) |
| (0.7 | ) |
| 1.7 |
|
| Balance at September 30 | | $ | 4.5 |
|
| $ | 5.1 |
|
| $ | 5.8 |
|
In fiscal 2020, we settled the position with the IRS related to the Transition Tax in the amount of $5.8 million, which reduced our unrecognized tax benefits.
We recognize accrued interest and penalties relatedrelated to unrecognized tax benefits as a component of income tax expense. Accrued interest and penalties, which are not presented in the reconciliationrollforward table above, were $2.6$1.4 million, $3.0$1.7 million and $3.0$2.1 million atas of September 30, 2017, 20162020, 2019 and 2015, respectively.2018. Related to interest and penalties, we recognized an income tax benefit of $0.4 million, in 2017$0.4 million, and $0.2$0.5 million in 2015. There was no income tax impactas of interest or penalties in 2016.September 30, 2020, 2019 and 2018.
Note 10.12. Earnings per Common Share
Basic earnings per share is calculated based upon the weighted average number of outstanding common shares for the period, plus the effect of deferred vested shares. Diluted earnings per share is calculated consistent with the basic earnings per share calculation plus the effect of dilutive unissued common shares related to stock-based employee compensation programs. For all periods presented, anti-dilutive stock options were excluded from the calculation of diluted earnings per share. Cumulative
treasury stock acquired, less cumulative shares reissued, have been excluded in determining the average number of shares outstanding.
Earnings per share are calculated as follows (share information in thousands):
| | | | | | | | | | | | | | | | | |
| | Year Ended September 30 |
| | 2020 | | 2019 | | 2018 |
| Net Income | $ | 223.0 | | | $ | 152.2 | | | $ | 252.4 | |
| | | | | |
| Net Income per Basic Common Share | $ | 3.35 | | | $ | 2.28 | | | $ | 3.81 | |
| | | | | |
| Net Income per Diluted Common Share | $ | 3.32 | | | $ | 2.25 | | | $ | 3.73 | |
| | | | | |
| Average Basic Common Shares Outstanding (in thousands) | 66,631 | | | 66,772 | | | 66,234 | |
| Add: Potential effect of exercise of stock options and other unvested equity awards | 581 | | | 888 | | | 1,378 | |
| Average Diluted Common Shares Outstanding (in thousands) | 67,212 | | | 67,660 | | | 67,612 | |
| | | | | |
| Shares with anti-dilutive effect excluded from the computation of Diluted EPS | 342 | | | 288 | | | 263 | |
Note 13. Common Stock
Share Repurchases
Under the Board-approved share repurchase program, authorization of $340.0 million was previously granted to repurchase shares. In September 2019, the Board approved an additional $170.0 million for repurchases. Repurchases may be made on the open market or via private transactions, and are used to manage our capital structure, offset the dilutive impact of stock-based compensation and return cash to shareholders. This program does not have an expiration date and there are no plans to terminate this program in the future. For the fiscal year ended September 30, 2020, we repurchased 0.5 million shares of our common stock in the open market valued at $54.1 million. For the fiscal year ended September 30, 2019, we repurchased 1.2 million shares of our common stock in the open market valued at $117.2 million. We did not repurchase shares in fiscal 2018 in the open market. As of September 30, 2020, a cumulative total of $346.6 million had been used, leaving us with availability of $163.4 million for future repurchases.
The following table summarizes common stock purchased in connection with employee payroll tax withholding for restricted stock distributions for the following fiscal years:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30 |
| | 2020 | | 2019 | | 2018 |
| Total number of shares purchased | | 158,521 | | | 48,908 | | | 158,182 | |
| Dollar value of shares purchased | | $ | 16.5 | | | $ | 4.7 | | | $ | 14.1 | |
Stock-Based Compensation
We have stock-based compensation plans under which employees and non-employee directors may be granted options to purchase shares of Company common stock at the fair market value at the time of grant. In addition to stock options, we grant performance share units (“PSUs”) and RSUs to certain management level employees and vested restricted stock to non-employee directors. We also offer eligible employees the opportunity to buy shares of our common stock at a discount via an Employee Stock Purchase Plan (“ESPP”).
Our primary stock-based compensation program is the Stock Incentive Plan, which has been approved by our shareholders. Under the Stock Incentive Plan, we have a total of 15.3 million authorized shares. As of September 30, 2020, approximately 1.2 million shares were available for future grants under our stock-based compensation plans. We generally settle our stock-based awards with treasury shares. As of September 30, 2020, we had 21.8 million treasury shares available for use to settle stock-based awards.
|
| | | | | | | | | | | |
| | Year Ended September 30 |
| | 2017 | | 2016 | | 2015 |
| Net income attributable to common shareholders | $ | 133.6 |
| | $ | 124.1 |
| | $ | 47.7 |
|
| | | | | | |
| Average shares outstanding - Basic | 65,599 |
| | 65,333 |
| | 57,249 |
|
Add potential effect of exercise of stock options
and other unvested equity awards | 1,626 |
| | 1,263 |
| | 1,287 |
|
| Average shares outstanding - Diluted | 67,225 |
| | 66,596 |
| | 58,536 |
|
| | | | | | |
| Net income attributable to common shareholders per common share - Basic | $ | 2.04 |
| | $ | 1.90 |
| | $ | 0.83 |
|
| | |
| | |
| | |
| Net income attributable to common shareholders per common share - Diluted | $ | 1.99 |
| | $ | 1.86 |
| | $ | 0.82 |
|
We recognize a tax benefit based on the increase in value from the grant date to the exercise date for stock options and from the grant date to the distribution date for the performance share units and restricted share units. The tax benefit is recorded during the year in which the exercise or distribution occurs. The tax benefit for exercises and distributions for the fiscal years ended September 30, 2020, 2019 and 2018 was $4.7 million, $5.2 million, and $16.1 million.
Options
Stock options granted by our Compensation Committee of our Board under the Stock Incentive Plan are non-qualified stock options. These awards are generally granted with exercise prices equal to the average of the high and low prices of our common stock on the date of grant. They vest in equal annual installments over a three- or four-year period and the maximum contractual term is ten years. We use a Binomial option-pricing model to estimate the fair value of stock options, and compensation cost is recognized on a straight-line basis over the requisite service period.
The following table sets forth the weighted average fair value per share of stock options and the related valuation assumptions used in the determination of those fair values:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2020 | | 2019 | | 2018 |
| Weighted average fair value per share | | $ | 24.80 | | | $ | 25.28 | | | $ | 22.50 | |
| | | | | | |
| Valuation assumptions: | | | | | | |
| Risk-free interest rate | | 1.6% | | 3.0% | | 2.2% |
| Expected dividend yield | | 0.8% | | 0.8% | | 0.9% |
| Expected volatility | | 27.7% | | 30.5% | | 30.8% |
| Weighted average expected life (years) | | 4.7 | | 4.7 | | 4.9 |
The risk-free interest rate is based upon observed U.S. Treasury interest rates appropriate for the term of our employee stock options. Expected dividend yield is based on the history and our expectation of dividend payouts. Expected volatility was based on our historical stock price volatility. Expected life represents the weighted average period the stock options are expected to remain outstanding and is a derived output of the Binomial model. The expected life of employee stock options is impacted by the above assumptions as well as the post-vesting forfeiture rate and the exercise factor used in the Binomial model. These two variables are based on the history of exercises and forfeitures for previous stock options granted by us.
The following table summarizes transactions under our stock option plans for the fiscal year ended September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Weighted
Average
Number of
Shares
(in thousands) | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic
Value
(in millions) |
| Balance Outstanding as of October 1, 2019 | | 718 | | | $ | 71.14 | | | — | | | — | |
| Granted | | 188 | | | 103.11 | | | — | | | — | |
| Exercised | | (144) | | | 60.08 | | | — | | | — | |
| Cancelled/Forfeited | | (22) | | | 80.54 | | | — | | | — | |
| Balance Outstanding as of September 30, 2020 | | 740 | | | $ | 81.14 | | | 6.9 | | $ | 7.9 | |
| Exercisable as of September 30, 2020 | | 334 | | | $ | 65.87 | | | 5.3 | | $ | 6.8 | |
| Options Expected to Vest | | 391 | | | 93.56 | | | 8.2 | | 1.1 | |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, based on our closing stock price of $83.51, as reported by the New York Stock Exchange on September 30, 2020. This amount, which changes continuously based on the fair value of our common stock, would have been received by the option holders had all option holders exercised their options as of the balance sheet date.
The total intrinsic value of options exercised in the fiscal years ended September 30, 2020, 2019 and 2018 was $6.9 million, $17.7 million and $54.7 million.
As of September 30, 2020, there was $5.5 million of unrecognized compensation expense related to stock options granted under the Stock Incentive Plan. This unrecognized compensation expense does not consider potential forfeitures, and is expected to be recognized over a weighted average period of 2.1 years.
Restricted Stock Units
RSUs are granted to certain employees with fair values equal to the average of the high and low prices of our common stock on the date of grant, multiplied by the number of units granted. RSU grants are contingent upon continued employment and vest over periods ranging from one to four years. Dividends, payable in common stock equivalents, accrue on the grants and are subject to the same specified terms as the original grants, including the risk of forfeiture.
The following table summarizes transactions for our nonvested RSUs for the fiscal year ended 2020:
| | | | | | | | | | | | | | |
| | Number of
Share Units
(in thousands) | | Weighted
Average
Grant Date
Fair Value |
| Nonvested RSUs as of October 1, 2019 | | 371 | | $ | 95.76 | |
| Granted | | 242 | | | 101.74 | |
| Vested | | (234) | | | 78.08 | |
| Forfeited | | (42) | | | 95.14 | |
| Nonvested RSUs as of September 30, 2020 | | 337 | | $ | 112.41 | |
As of September 30, 2020, there was $19.3 million of total unrecognized compensation expense related to nonvested RSUs granted under the Stock Incentive Plan. This unrecognized compensation expense does not consider potential forfeitures, and is expected to be recognized over a weighted average period of 1.7 years. The total vest date fair value of shares that vested in the fiscal years ended September 30, 2020, 2019 and 2018 was $18.1 million, $16.6 million and $21.9 million.
Performance Share Units
Our Compensation Committee grants PSUs to certain employees and these awards are subject to any stock dividends, stock splits, and other similar rights inuring to common stock, but unlike our RSUs are not entitled to dividend reinvestment. Vesting of the grants is contingent upon achievement of performance targets and corresponding service requirements.
The fair value of the PSUs is equal to the average of the high and low prices of our common stock on the date of grant, multiplied by the number of units granted. For PSUs with a market condition such as total shareholder return, the Monte-Carlo simulation method is used to determine fair value. The Monte-Carlo simulation is a generally accepted statistical technique used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of our and our group of peer companies’ future expected stock prices.
The following table sets forth the weighted average fair value per share for PSUs and the related valuation assumptions used in the determination of those fair values. PSUs granted for the fiscal years ended September 30, 2020, 2019 and 2018 are based on company-specific performance targets, with a total shareholder return collar.
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2020 | | 2019 | | 2018 |
| Weighted average fair value per share | | $ | 110.53 | | | $ | 112.79 | | | $ | 87.42 | |
| | | | | | |
| Valuation assumptions: | | | | | | |
| Risk-free interest rate | | 1.6% | | 3.0% | | 1.9% |
| Expected volatility | | 23.8% | | 22.8% | | 21.9% |
The basis for the assumptions listed above is similar to the valuation assumptions used for stock options, as discussed previously.
The following table summarizes transactions for our nonvested PSUs in fiscal 2020:
| | | | | | | | | | | | | | |
| | Number of
Share Units
(in thousands) | | Weighted
Average
Grant Date
Fair Value |
| Nonvested PSUs as of October 1, 2019 | | 206 | | $ | 98.78 | |
| Granted | | 161 | | 84.34 | |
| Vested | | (187) | | 75.35 | |
| Forfeited | | (15) | | 93.47 | |
| Nonvested PSUs as of September 30, 2020 | | 165 | | $ | 111.73 | |
As of September 30, 2020, there was $7.3 million of unrecognized compensation expense related to PSUs granted under the Stock Incentive Plan based on the expected achievement of certain performance targets or market conditions. This unrecognized compensation expense as of September 30, 2020 does not reflect a reduction for our estimate of potential forfeitures and is expected to be recognized over a weighted average period of 1.6 years. The total fair value of shares that vested in the fiscal years ended September 30, 2020, 2019 and 2018 was $14.1 million, $8.0 million and $16.4 million.
Note 11.14. Segment Reporting
We disclose segment information that is consistent with the way in which management operates and views the business. During our first quarter of fiscal 2017, we changed our segment reporting to reflect changes in our organizational structure and management’s operation and view of the business. We combined the prior year North America Patient Support Systems segment and International Patient Support Systems segment into a new segment called Patient Support Systems. Our Patient Support Systems segment now also includes an additional component of global marketing spend that was previously unallocated. The prior year segment information included in this Form 10-K has been updated to reflect these changes. Our revised operating structure contains the following reportingreportable segments:
•Patient Support Systems –globally provides an ecosystem of our specialty bed framesdigital and surfacesconnected care solutions: devices, software, communications and mobility solutions, as well as our clinical workflow solutions which specializes in software and informationintegration technologies tothat improve care and deliver actionable insightinsights to caregivers and patients.
patients in the acute care setting. Key products include care communications and mobility solutions, connected med-surg and ICU bed systems, sensors and surfaces, safe patient handling equipment and services.
•Front Line Care –globally provides respiratoryintegrated patient monitoring and diagnostic technologies – from hospital to home – that enable and support Hillrom’s connected care products, and sells medical diagnostic monitoring equipment and a diversifiedstrategy. Our diverse portfolio of physicalincludes secure, connected, digital assessment tools that assess,technologies to help diagnose, treat and manage a wide variety of illnesses and diseases.
diseases, including respiratory therapy, cardiology, vision screening and physical assessment.
•Surgical Solutions –globally providesenables peak procedural performance, connectivity and video integration products that improve surgicalcollaboration, workflow, safety and efficiency in the operating room, includingsuch as surgical video technologies, tables, lights, pendants, precision positioning devices and various other surgical products and accessories.
Under our revised segments, ourOur performance within each reportable segment continues to be measured on a divisional income basis before non-allocated operating and administrative costs, litigation, special charges, acquisition and integration costs, acquisition-related intangible asset amortization, and other unusual events. Divisional income generally represents the division’s gross profit less its direct operating costs along with an allocation of manufacturing and distribution costs, research and development and certain corporate functional expenses.
Non-allocated operating costs, administrative costs, and other includes functional expenses that support the entire organization such as administration, finance, legal and human resources, expenses associated with strategic developments, acquisition-related intangible asset amortization, and other events that are not indicative of operating trends. We exclude such amounts from divisional income to allow management to evaluate and understand divisional operating trends. The chief operating decision maker does not receive any asset information by operating segment and, accordingly, we do not report asset information by operating segment.
|
| | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2017 | | 2016 | | 2015 |
| Revenue: | | | | | | |
| Patient Support Systems | | $ | 1,423.9 |
| | $ | 1,437.2 |
| | $ | 1,426.6 |
|
| Front Line Care | | 885.3 |
| | 809.7 |
| | 139.0 |
|
| Surgical Solutions | | 434.5 |
| | 408.3 |
| | 422.6 |
|
| Total revenue | | $ | 2,743.7 |
| | $ | 2,655.2 |
| | $ | 1,988.2 |
|
| | | | | | | |
| Divisional income: | | |
| | |
| | |
| Patient Support Systems | | $ | 249.6 |
| | $ | 245.2 |
| | $ | 206.5 |
|
| Front Line Care | | 231.8 |
| | 202.1 |
| | 41.5 |
|
| Surgical Solutions | | 42.5 |
| | 46.2 |
| | 56.0 |
|
| | | | | | | |
| Other operating costs: | | |
| | |
| | |
| Non-allocated operating costs, administrative costs, and other | | 213.1 |
| | 223.3 |
| | 179.7 |
|
| Special charges | | 37.4 |
| | 39.9 |
| | 41.2 |
|
| Operating profit | | 273.4 |
| | 230.3 |
| | 83.1 |
|
| | | | | | | |
| Interest expense | | (88.9 | ) | | (90.4 | ) | | (18.4 | ) |
| Loss on extinguishment of debt | | — |
| | (10.8 | ) | | — |
|
| Investment income and other, net | | (1.5 | ) | | 9.2 |
| | 0.4 |
|
| Income before income taxes | | $ | 183.0 |
| | $ | 138.3 |
| | $ | 65.1 |
|
Effective for fiscal 2020, the allocation of operating costs to each segment was modified to improve the alignment to how management evaluates the performance of each segment. The fiscal 2019 and 2018 segment information has been recast to conform to the current presentation. The reclassification did not impact our reported Consolidated Net Revenue or Income Before Income Taxes.
The following summarizes financial results by reportable segment:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2020 | | 2019 | | 2018 |
| Net Revenue - United States: | | | | | | |
| Patient Support Systems | | $ | 1,133.6 | | | $ | 1,135.0 | | | $ | 1,054.6 | |
| Front Line Care | | 707.4 | | | 700.6 | | | 680.3 | |
| Surgical Solutions | | 125.8 | | | 221.2 | | | 221.5 | |
| Total net revenue - United States | | $ | 1,966.8 | | | $ | 2,056.8 | | | $ | 1,956.4 | |
| | | | | | |
| Net Revenue - Outside of the United States (“OUS”): | | | | | | |
| Patient Support Systems | | $ | 405.5 | | | $ | 355.5 | | | $ | 374.9 | |
| Front Line Care | | 317.6 | | | 277.5 | | | 279.9 | |
| Surgical Solutions | | 191.1 | | | 217.5 | | | 236.8 | |
| Total net revenue - OUS | | $ | 914.2 | | | $ | 850.5 | | | $ | 891.6 | |
| | | | | | |
| Net Revenue: | | | | | | |
| Patient Support Systems | | $ | 1,539.1 | | | $ | 1,490.5 | | | $ | 1,429.5 | |
| Front Line Care | | 1,025.0 | | | 978.1 | | | 960.2 | |
| Surgical Solutions | | 316.9 | | | 438.7 | | | 458.3 | |
| Total net revenue | | $ | 2,881.0 | | | $ | 2,907.3 | | | $ | 2,848.0 | |
| | | | | | |
| Divisional income: | | | | | | |
| Patient Support Systems | | $ | 332.3 | | | $ | 299.9 | | | $ | 285.0 | |
| Front Line Care | | 301.8 | | | 266.4 | | | 253.0 | |
| Surgical Solutions | | 39.5 | | | 61.2 | | | 53.1 | |
| | | | | | |
| Other operating costs: | | | | | | |
| Non-allocated operating costs, administrative costs, and other | | 264.4 | | | 283.0 | | | 224.1 | |
| Special charges | | 41.5 | | | 28.4 | | | 77.6 | |
| Operating profit | | $ | 367.7 | | | $ | 316.1 | | | $ | 289.4 | |
| | | | | | |
| Interest expense | | (74.0) | | | (89.6) | | | (95.0) | |
| Loss on extinguishment of debt | | (15.6) | | | (3.3) | | | 0 | |
| Investment income and other, net | | (6.9) | | | (14.6) | | | 2.8 | |
| Income before income taxes | | $ | 271.2 | | | $ | 208.6 | | | $ | 197.2 | |
| | | | | | |
| Depreciation and amortization of property, plant, equipment and intangibles: | | | | | | |
| Patient Support Systems | | $ | 43.5 | | | $ | 36.2 | | | $ | 37.4 | |
| Front Line Care | | 95.4 | | | 101.9 | | | 110.7 | |
| Surgical Solutions | | 7.4 | | | 28.4 | | | 20.8 | |
| Corporate | | 32.5 | | | 28.3 | | | 27.6 | |
| Total depreciation and amortization of property, plant, equipment and intangibles | | $ | 178.8 | | | $ | 194.8 | | | $ | 196.5 | |
Geographic Information
Geographic data for net revenue and long-lived assets (which consist mainly of property and equipment leased to others) were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2020 | | 2019 | | 2018 |
| Net revenue to unaffiliated customers: | | | | | | |
| United States | | $ | 1,966.8 | | | $ | 2,056.8 | | | $ | 1,956.4 | |
| Foreign | | 914.2 | | | 850.5 | | | 891.6 | |
| Total net revenue | | $ | 2,881.0 | | | $ | 2,907.3 | | | $ | 2,848.0 | |
| Long-lived assets: | | | | | | |
| United States | | $ | 222.7 | | | $ | 212.5 | | | $ | 239.5 | |
| Foreign | | 83.4 | | | 84.3 | | | 88.8 | |
| Total long-lived assets | | $ | 306.1 | | | $ | 296.8 | | | $ | 328.3 | |
|
| | | | | | | | | | | | |
| | | Year Ended September 30 |
| | | 2017 | | 2016 | | 2015 |
Net revenue to unaffiliated customers: (a) | | | | | | |
| United States | | $ | 1,895.2 |
| | $ | 1,829.4 |
| | $ | 1,273.0 |
|
| Foreign | | 848.5 |
| | 825.8 |
| | 715.2 |
|
| Total revenue | | $ | 2,743.7 |
|
| $ | 2,655.2 |
|
| $ | 1,988.2 |
|
Long-lived assets: (b) | | |
| | |
| | |
|
| United States | | $ | 243.9 |
| | $ | 234.2 |
| | $ | 263.9 |
|
| Foreign | | 111.5 |
| | 115.8 |
| | 114.5 |
|
| Total long-lived assets | | $ | 355.4 |
|
| $ | 350.0 |
|
| $ | 378.4 |
|
| |
(a) | Net revenue is attributed to geographic areas based on the location of the customer. |
| |
(b) | Includes property and equipment leased to others. |
Net revenue in the above table is attributed to geographic areas based on the location of the customer.
Note 12.15. Quarterly Financial Information (Unaudited)
The following table presents selected consolidated financial data by quarter for eachthe fiscal years ended 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 Quarter Ended | | December 31,
2019 | | March 31,
2020 | | June 30,
2020 | | September 30,
2020 |
| | | | | | | | |
| Net Revenue | | $ | 685.0 | | | $ | 723.2 | | | $ | 767.5 | | | $ | 705.3 | |
| Operating Profit | | 78.9 | | | 87.3 | | | 135.3 | | | 66.2 | |
| Net Income | | 39.8 | | | 46.9 | | | 93.9 | | | 42.4 | |
| Net Income per Basic Common Share | | 0.60 | | | 0.70 | | | 1.41 | | | 0.64 | |
| Net Income per Diluted Common Share | | 0.59 | | | 0.70 | | | 1.40 | | | 0.63 | |
| | | | | | | | |
| 2019 Quarter Ended | | December 31,
2018 | | March 31,
2019 | | June 30,
2019 | | September 30,
2019 |
| | | | | | | | |
| Net Revenue | | $ | 683.5 | | | $ | 714.2 | | | $ | 726.8 | | | $ | 782.8 | |
| Operating Profit | | 70.8 | | | 81.3 | | | 69.9 | | | 94.1 | |
| Net Income | | 42.2 | | | 49.5 | | | 32.6 | | | 27.9 | |
| Net Income per Basic Common Share | | 0.63 | | | 0.74 | | | 0.49 | | | 0.42 | |
| Net Income per Diluted Common Share | | 0.62 | | | 0.74 | | | 0.48 | | | 0.41 | |
|
| | | | | | | | | | | | | | | | |
| 2017 Quarter Ended | | December 31,
2016 | | March 31,
2017 | | June 30,
2017 | | September 30,
2017 |
| | | | | | | | | |
| Net Revenue | | $ | 637.4 |
| | $ | 678.9 |
| | $ | 689.1 |
| | $ | 738.3 |
|
| Gross Profit | | $ | 302.6 |
| | $ | 324.4 |
| | $ | 331.1 |
| | $ | 362.5 |
|
| Net Income Attributable to Common Shareholders | | $ | 23.8 |
| | $ | 34.4 |
| | $ | 6.0 |
| | $ | 69.4 |
|
Net Income Attributable to Common Shareholders per Common Share - Basic | | $ | 0.36 |
| | $ | 0.52 |
| | $ | 0.09 |
| | $ | 1.06 |
|
Net Income Attributable to Common Shareholders per Common Share - Diluted | | $ | 0.36 |
| | $ | 0.51 |
| | $ | 0.09 |
| | $ | 1.03 |
|
| | | | | | | | | |
| 2016 Quarter Ended | | December 31,
2015 | | March 31,
2016 | | June 30,
2016 | | September 30,
2016 |
| | | | | | | | | |
| Net Revenue | | $ | 661.2 |
| | $ | 632.6 |
| | $ | 655.4 |
| | $ | 706.0 |
|
| Gross Profit | | $ | 290.7 |
| | $ | 304.2 |
| | $ | 315.4 |
| | $ | 346.7 |
|
| Net Income Attributable to Common Shareholders | | $ | 4.8 |
| | $ | 22.3 |
| | $ | 45.3 |
| | $ | 51.7 |
|
Net Income Attributable to Common
Shareholders per Common Share - Basic | | $ | 0.07 |
| | $ | 0.34 |
| | $ | 0.69 |
| | $ | 0.79 |
|
Net Income Attributable to Common
Shareholders per Common Share - Diluted | | $ | 0.07 |
| | $ | 0.33 |
| | $ | 0.68 |
| | $ | 0.77 |
|
Note 13.16. Commitments and Contingencies
Lease Commitments
Rental expense for fiscal years 2017, 2016 and 2015 was $30.5 million, $31.7 million and $25.2 million, respectively. The table below indicates the minimum annual rental commitments (excluding renewable periods) aggregating $105.1 million, for manufacturing facilities, warehouse distribution centers, service centers and sales offices, under non-cancelable operating leases.
|
| | | |
| | Amount |
| 2018 | $ | 31.7 |
|
| 2019 | $ | 23.4 |
|
| 2020 | $ | 15.7 |
|
| 2021 | $ | 11.9 |
|
| 2022 | $ | 8.8 |
|
| 2023 and beyond | $ | 13.6 |
|
Self Insurance
We are involved in various claims, including product and general liability, workers’ compensation, auto liability and employment related matters. Such claims in the United States have deductibles and self-insured retentions ranging from $25.0 thousand to $1.0 million per occurrence or per claim, depending upon the type of coverage and policy period. International deductibles and self-insured retentions are lower. We are also generally self-insured up to certain stop-loss limits for certain employee health benefits, including medical, drug and dental. Our policy is to estimate reserves based upon a number of factors including known claims, estimated incurred but not reported claims and outside actuarial analysis, which are based on historical information along with certain assumptions about future events. Such estimated reserves are classified as Other Current Liabilities and Other Long-Term Liabilities within the Consolidated Balance Sheets.
Legal Proceedings
General
We are subject to various other claims and contingencies arising out of the normal course of business, including those relating to governmental investigations and proceedings, commercial transactions, product liability, employee related matters, antitrust, safety, health, taxes, environmental and other matters. Litigation is subject to many uncertainties and the outcome of individual litigated matters is not predictable with assurance. It is possible that some litigation matters for which reserves have not been established could be decided unfavorably to us, and that any such unfavorable decisions could have a material adverse effect on our financial condition, results of operations and cash flows.
Universal Hospital Services, Inc. LitigationSelf Insurance
On January 13, 2015, Universal Hospital Services, Inc. filed a complaint against usWe are involved in various claims, including product and general liability, workers’ compensation, auto liability and employment related matters. Such claims in the United States District Courthave deductibles and self-insured retentions at various limits up to $1.0 million per occurrence or per claim, depending upon the type of coverage and policy period. International deductibles and self-insured retentions are lower. We are also generally self-insured up to certain stop-loss limits for certain employee health benefits, including medical, drug and dental. Our policy is to estimate reserves based upon a number of factors including known claims, estimated incurred but not reported claims and outside actuarial analysis, which are based on historical information along with certain assumptions about future events. Such estimated reserves are classified as Other current liabilities and Other long-term liabilities in the Western DistrictConsolidated Balance Sheets.
SCHEDULE II
HILL-ROM HOLDINGS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Fiscal years ended September 30, 2020, 2019 and 2018
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | ADDITIONS | | | | | | | | |
| DESCRIPTION | | BALANCE AS OF
BEGINNING
OF PERIOD | | CHARGED TO
COSTS AND
EXPENSES | | CHARGED TO
OTHER
ACCOUNTS | | | | DEDUCTIONS
NET OF
RECOVERIES | | | | BALANCE
AS OF END
OF PERIOD |
| Reserves deducted from assets to which they apply: | | | | | | | | | | | | | | |
| Allowance for possible losses and sales returns - accounts receivable: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Fiscal Year Ended: | | | | | | | | | | | | | | |
| September 30, 2020 | | $ | 20.6 | | | $ | 8.8 | | | $ | (0.3) | | | 1 | | $ | (3.2) | | | 2 | | $ | 25.9 | |
| September 30, 2019 | | 21.8 | | | 5.0 | | | 0.7 | | | 1 | | (6.9) | | | 2 | | 20.6 | |
| September 30, 2018 | | 25.1 | | | 2.5 | | | 0.2 | | | 1 | | (6.0) | | | 2 | | 21.8 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Valuation allowance against deferred tax assets: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Fiscal Year Ended: | | | | | | | | | | | | | | |
| September 30, 2020 | | $ | 45.0 | | | $ | 4.6 | | | $ | 0.5 | | | 3 | | $ | 0.7 | | | | | $ | 50.8 | |
| September 30, 2019 | | 80.2 | | | 2.2 | | | 4.5 | | | 3 | | (41.9) | | | 4 | | 45.0 | |
| September 30, 2018 | | 58.2 | | | 23.1 | | | 0 | | | | | (1.1) | | | | | 80.2 | |
1 Reduction of gross revenue for uncollectible health care rental reimbursements, cash discounts and other things, that we engagedadjustments in certain customer contracting practices in violationdetermining net revenue. Also includes the effect of state and federal antitrust laws. The plaintiff also has asserted claims for tortious interference with business relationships. The plaintiff seeks injunctive relief and money damages in an unspecified amount. No trial date has been set. We believe thatacquired businesses, if any.
2 Generally reflects the allegations are without merit and intend to defend this matter vigorously.write-off of specific receivables against recorded reserves.
3 Generally reflects the effect of acquired businesses, if any.
4 Primarily reflects utilization of valuation allowance as a result of forfeitures on net operating losses.
| |
Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE
|
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE
None.
| |
Item 9A. | CONTROLS AND PROCEDURES |
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the supervision and participation of our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer (the "Certifying Officers"“Certifying Officers”), has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2017.2020. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and such information is accumulated and communicated to management, including our Certifying Officers and our Board, as appropriate to allow timely decisions regarding required disclosure.
Based upon that evaluation, the Certifying Officers concluded that our disclosure controls and procedures were effective as of September 30, 2017.2020.
Management’s Report on Internal Control Over Financial Reporting
The report of management’s assessment of the effectiveness of our internal control over financial reporting as of September 30, 20172020 and the related report of our independent registered public accounting firm, are included under Part II,in Item 8 of this Form 10-K. We have excluded Mortara from our assessment of internal control over financial reporting as of September 30, 2017, because Mortara was acquired by us in a purchase business combination in the second quarter of 2017. Mortara is a wholly-owned subsidiary whose total assets and total revenues represent approximately 2.0% and 2.5%, respectively, of the related consolidated financial statement amounts as of and for the year ended September 30, 2017. We are currently in the process of evaluating and integrating Mortara’s historical internal control over financial reporting structure with ours. We expect to complete this integration in fiscal 2018.
Changes in Internal Control Over Financial Reporting
There have been no changes to our internal controls over financial reporting.reporting for the quarter ended September 30, 2020. Management’s report on our internal control over financial reporting is included under Part II,in Item 8 of this Form 10-K.
| |
Item 9B. | OTHER INFORMATION |
Item 9B. OTHER INFORMATION
None.
PART III
| |
Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated herein by reference to our Proxy Statement to be filed with the SEC in January 20182021 relating to our 20182021 Annual Meeting of Shareholders (the "2018“2021 Proxy Statement"Statement”), under the headings "Election“Election of Directors", "SectionDirectors,” “Section 16(a) Beneficial Ownership Reporting Compliance",Compliance,” and "Corporate“Corporate Governance."” Information relating to our executive officers is included in this Form 10-K in Part I, Item 1 under the caption "Executive“Executive Officers."”
| |
Item 11. | EXECUTIVE COMPENSATION |
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the 20182021 Proxy Statement, under the heading "Executive“Executive Compensation."”
| |
Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS
|
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference to the 20182021 Proxy Statement, under the headings "Security“Security Ownership of Certain Beneficial Owners and Management"Management” and "Equity“Equity Compensation Plan Information."”
| |
Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein by reference to the 20182021 Proxy Statement, where such information is included under the heading "Corporate“Corporate Governance."”
| |
Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the 20182021 Proxy Statement, where such information is included under the heading "Proposals“Proposals Requiring Your Vote - Ratification of Appointment of Independent Registered Public Accounting Firm."”
PART IV
| |
Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| |
(a) | The following documents have been filed as a part of this Form 10-K or, where noted, incorporated by reference: |
(a)The following documents have been filed as a part of this Form 10-K or, where noted, incorporated by reference:
(1)Financial Statements
The financial statements of the Company and its consolidated subsidiaries are listed under Part II, Item 8 on the Index to the Consolidated Financial Statements.
| |
(2) | Financial Statement Schedules |
(2)Financial Statement Schedules
The financial statement schedule filed in response to Part II, Item 8 and Part IV, Item 15(c) of Form 10-K is listed under Part II, Item 8 on the Index to Consolidated Financial Statements.
| |
(3) | Exhibits (See changes to Exhibit Index below): |
"(3)Exhibits (See changes to Exhibit Index below):
“The Exhibit Index, which follows the signature page to this Form 10-K and is hereby incorporated herein by reference, sets forth a list of those exhibits filed herewith, and includes and identifies management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by Item 601 (b)(10)(iii) of Regulation S-K."”
The agreements included as exhibits to this Form 10-K are intended to provide information regarding their terms and not to provide any other factual or disclosure information about us or the other parties to the agreements. The agreements may contain representations and warranties by the parties to the agreements, including us, solely for the benefit of the other parties to the applicable agreement. Such representation and warranties:
•should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
•may have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
•may apply standards of materiality in a way that is different from what may be viewed as material to certain investors; and
•were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.
SCHEDULE II
HILL-ROM HOLDINGS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
For The Fiscal Years Ended September 30, 2017, 2016 and 2015
(Dollars in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | ADDITIONS | | | | | | | | |
| DESCRIPTION | | BALANCE AT BEGINNING OF PERIOD | | CHARGED TO COSTS AND EXPENSES | | CHARGED TO OTHER ACCOUNTS | | | | DEDUCTIONS NET OF RECOVERIES | | | | BALANCE AT END OF PERIOD |
| Reserves deducted from assets to which they apply: | | | | | | | | | | | | | | |
| Allowance for possible losses and sales returns - accounts receivable: | | | | | | | | | | | | | | |
| Period Ended: | | | | | | | | | | | | | | |
| September 30, 2017 | | $ | 26.8 |
| | $ | 4.3 |
| | $ | 2.0 |
| | (a) | | $ | (8.0 | ) | | (b) | | $ | 25.1 |
|
| September 30, 2016 | | $ | 26.0 |
| | $ | 2.1 |
| | $ | 2.2 |
| | (a) | | $ | (3.5 | ) | | (b) | | $ | 26.8 |
|
| September 30, 2015 | | $ | 31.4 |
| | $ | 1.8 |
| | $ | 0.1 |
| | (a) | | $ | (7.3 | ) | | (b) | | $ | 26.0 |
|
| | | | | | | | | | | | | | | |
| Valuation allowance against deferred tax assets: | | |
| | |
| | |
| | | | |
| | | | |
|
| Period Ended: | | |
| | |
| | |
| | | | |
| | | | |
|
| September 30, 2017 | | $ | 26.9 |
| | $ | 30.8 |
| | $ | — |
| | (c) | | $ | 0.5 |
| | (d) | | $ | 58.2 |
|
| September 30, 2016 | | $ | 40.7 |
| | $ | (14.9 | ) | | $ | — |
| | (c) | | $ | 1.1 |
| | (d) | | $ | 26.9 |
|
| September 30, 2015 | | $ | 28.3 |
| | $ | 4.0 |
| | $ | 11.1 |
| | | | $ | (2.7 | ) | | (d) | | $ | 40.7 |
|
| |
(a) | Reduction of gross revenue for uncollectible health care rental reimbursements, cash discounts and other adjustments in determining net revenue. Also includes the effect of acquired businesses, if any. |
| |
(b) | Generally reflects the write-off of specific receivables against recorded reserves. |
| |
(c) | Generally reflects the effect of acquired businesses, if any. |
| |
(d) | Primarily reflects write-offs of deferred tax assets against the valuation allowance. |
HILL-ROM HOLDINGS, INC.
INDEX TO EXHIBITS
Management contracts and compensatory plans or arrangements are designated with "*"“*”.
|
| | | | |
| Agreement and Plan of Merger dated June 16, 2015 by and among Hill-Rom Holdings, Inc., Empire Merger Sub Corp., and Welch Allyn Holdings, Inc. (Incorporated herein by reference to Exhibit 2.1 filed with the Company’s Form 8-K dated June 17, 2015) |
| |
| Share Purchase and Transfer Agreement dated as of June 13, 2014 by and among TRUMPF International Beteiligungs-GmbH, Hill-Rom Holdings Netherlands B.V., HR Europe B.V. and Hill-Rom Holdings, Inc. (Incorporated herein by reference to Exhibit 1.1 filed with the Company’s Form 8-K dated June 16, 2014) |
| |
| Restated and Amended Articles of Incorporation of Hill-Rom Holdings, Inc., as currently in effect (Incorporated herein by reference to Exhibit 3.1 filed with the Company’s Form 8-K dated March 10, 2010) |
| |
| Amended and Restated Code of By-LawsBy-laws of Hill-Rom Holdings, Inc., as currently in effect (Incorporated herein by reference to Exhibit 3.23.1 filed with the Company’s Form 8-K dated March 10, 2010)November 6, 2020) |
| |
| 4.1 | Indenture dated as of December 1, 1991, between Hill-Rom Holdings, Inc. and Union Bank, N.A. (as successor to LaSalle Bank National Association and Harris Trust and Savings Bank) as Trustee (Incorporated herein by reference to Exhibit (4) (a) to Registration Statement on Form S-3, Registration No. 33-44086) |
| |
| Indenture dated as of September 1, 2015, between Hill-Rom Holdings, Inc. and MUFG Union Bank, N.A., as Trustee (Incorporated herein by reference to Exhibit 4.1 to the Company’s Form 8-K dated September 1, 2015) |
| |
| First Supplemental Indenture dated September 8, 2015, among Hill-Rom Holdings, Inc., the guarantors party thereto, and MUFG Union Bank, N.A., as Trustee (Incorporated herein by reference to Exhibit 4.3 to the Company's Form 10-K dated November 17, 2016) |
| |
| Second Supplemental Indenture dated as of September 29, 2016, among Hill-Rom Holdings, Inc., the guarantors party thereto, and MUFG Union Bank, N.A., as Trustee (Incorporated herein by reference to Exhibit 4.4 to the Company's Form 10-K dated November 17, 2016) |
| |
| Third Supplemental Indenture dated May 12, 2017, among Hill-Rom Holdings, Inc., the guarantors party thereto, and MUFG Union Bank, N.A., as Trustee |
| |
| Indenture dated as of February 14, 2017, between Hill-Rom Holdings, Inc., the guarantors party thereto, and MUFG Union Bank, N.A., as Trustee (Incorporated herein by reference to Exhibit 4.1 to the Company'sCompany’s Form 8-K dated February 14, 2017) |
| |
| First Supplemental Indenture dated May 12, 2017, among Hill-Rom Holdings, Inc., the guarantors party thereto, and MUFG Union Bank, N.A., as Trustee |
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| Hill-Rom Holdings, Inc. Amended and Restated Short Term Incentive Compensation Program (Incorporated herein by reference to Exhibit 10.1 filed with4.7 to the Company’s Form 10-K dated November 24, 2009)17, 2017) |
| |
| Form of Director Indemnity AgreementIndenture, dated September 19, 2019, among Hill-Rom Holdings, Inc., the subsidiary guarantors party thereto, and Citibank, N.A., as Trustee (Incorporated herein by reference to Exhibit 10.6 filed with4.1 to the Company’s Form 10-K8-K dated December 23, 2003)September 19, 2019) |
| |
| Form of Indemnity Agreement betweenFirst Supplemental Indenture dated October 16, 2019, among Hill-Rom Holdings, Inc., the guarantors party thereto, and certain executive officersCitibank, N.A., as Trustee (Incorporated herein by reference to Exhibit 10.6 filed with4.9 to the Company’s Form 10-K dated November 16, 2011) |
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| 15, 2019) |
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| Second Supplemental Indenture dated May 3, 2019, among Hill-Rom Holdings, Inc., the guarantors party thereto, and MUFG Union Bank, N.A., as Trustee |
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| Third Supplemental Indenture dated October 16, 2019, among Hill-Rom Holdings, Inc., the guarantors party thereto, and MUFG Union Bank, N.A., as Trustee (Incorporated herein by reference to Exhibit 4.10 to the Company’s Form 10-K dated November 15, 2019) |
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| Description of Securities |
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| Hill-Rom Holdings, Inc. Board of Directors’ Deferred Compensation Plan (Incorporated herein by reference to Exhibit 10.10 filed with the Company’s Form 10-Q dated July 13, 2001) |
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| Hill-Rom Holdings, Inc. Director Phantom Stock Plan and form of award (Incorporated herein by reference to Exhibit 10.11 filed with the Company’s Form 10-Q dated July 13, 2001) |
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| Form of Director Indemnity Agreement (Incorporated herein by reference to Exhibit 10.6 filed with the Company’s Form 10-K dated December 23, 2003) |
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| Form of Indemnity Agreement between Hill-Rom Holdings, Inc. and certain executive officers (Incorporated herein by reference to Exhibit 10.9 filed with the Company’s Form 10-K dated December 23, 2003) |
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| | | | | |
| Amended and Restated Hill-Rom Holdings, Inc. Stock Incentive Plan, as currently in effect (Incorporated herein by reference to Exhibit 10.30 filed with the Company’s Form 10-K dated November 24, 2009) |
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| Hill-Rom Holdings, Inc. Employee Stock Purchase Plan (Incorporated herein by reference to Appendix I to the Company’s definitive Proxy Statement on Schedule 14A dated January 7, 2009) |
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| Employment Agreement dated January 6, 2010 between Hill-Rom Holdings, Inc. and John J. Greisch (Incorporated herein by reference to Exhibit 10.1 filed with the Company’s Form 8-K dated January 7, 2010) |
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| Form of Change in Control Agreement between Hill-Rom Holdings, Inc. and certain of its officers, including Named Executive Officers (other than the CEO) (Incorporated herein by reference to Exhibit 10.58 filed with the Company’s Form 10-K dated November 17, 2010) |
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| Amended Change in Control Agreement between Hill-Rom Holdings, Inc. and John J. Greisch dated September 30, 2010 (Incorporated herein by reference to Exhibit 10.59 filed with the Company’s Form 10-K dated November 17, 2010) |
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| Hill-Rom Holdings, Inc. Short-Term Incentive Compensation Plan (Incorporated herein by reference to Appendix 1 to the Hill-Rom Holdings, Inc. Definitive Proxy Statement on Schedule 14A dated January 18, 2011) |
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| Hill-Rom Holdings, Inc. Amended and Restated Supplemental Executive Retirement Plan (Incorporated herein by reference to Exhibit 10.69 filed with the Company’s Form 10-K dated November 16, 2011) |
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| EmploymentForm of Indemnity Agreement between Hill-Rom Holdings, Inc. and Alton Shader, dated July 11, 2011certain executive officers (Incorporated herein by reference to Exhibit 10.2 filed with the Company’s Form 10-Q dated July 28, 2011) |
| |
| Employment Agreement between Hill-Rom Holdings, Inc. and Andreas Frank, dated October 3, 2011 (Incorporated herein by reference to Exhibit 10.7210.6 filed with the Company’s Form 10-K dated November 16, 2011) |
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| Employment Agreement between Hill-Rom Holdings, Inc. and Steven Strobel, dated October 23, 2014 (Incorporated herein by reference to Exhibit 10.1 filed with the Company’s Form 8-K dated October 27, 2014) |
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| Form of Limited Recapture Agreement between Hill-Rom Holdings, Inc. and certain of its officers, including Named Executive Officers (Incorporated herein by reference to Exhibit 10.34 filed with the Company’s Form 10-K dated November 20, 2013) |
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| Employment Agreement between Hill-Rom Holdings, Inc. and Carlos Alonso-Marum dated March 19, 2015 (Incorporated herein by reference to Exhibit 10.2 to the Company’s Form 10-Q dated August 7, 2015) |
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| Employment Agreement between Hill-Rom Holdings, Inc. and Kenneth Meyers dated September 23, 2015 (Incorporated herein by reference to Exhibit 10.29 filed with the Company’s Form 10-K dated November 19, 2015) |
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| Employment Agreement between Hill-Rom Holdings, Inc. and Taylor Smith dated November 11, 2013 (Incorporated herein by reference to Exhibit 10.30 filed with the Company’s Form 10-K dated November 19, 2015) |
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| FY 2016 Non-Employee Director Compensation Policy (Incorporated herein by reference to Exhibit 10.31 filed with the Company’s Form 10-K dated November 19, 2015) |
|
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| Employment Agreement between Hill-Rom Holdings, Inc. and Deborah Rasin dated November 6, 2015 (Incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q dated February 1, 2016) |
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| Letter Agreement between Hill-Rom Holdings, Inc. and Jason Richardson (Incorporated herein by reference to Exhibit 10.1 filed with the Company’s Form 8-K dated March 16, 2016) |
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| Form of Indemnity Agreement between Hill-Rom Holdings, Inc. and certain executive officers (Incorporated herein by reference to Exhibit 10.9 filed with the Company’s Form 10-K dated December 23, 2003) |
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| Employment Agreement between Hill-Rom Holdings, Inc. and Dirk Ehlers (Incorporated herein by reference to Exhibit 10.3 to the Company’s Form 10-Q dated April 29, 2016) |
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| Amended and Restated Credit Agreement dated as of September 21, 2016,August 30, 2019 among Hill-Rom Holdings, Inc, Welch Allyn, Inc., JP Morganthe other borrowers from time to time party thereto, the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent and the lenders party thereto (Incorporated herein by reference to Exhibit 10.1 to the Company’sCompany's Form 8-K dated September 22, 2016)August 30, 2019) |
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| Loan and Security Agreement dated May 5, 2017, among Hill-Rom Finance Company LLC, as Borrower, the persons from time to time party hereto, as lenders and as Group Agents, The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Administrative Agent, and Hill-Rom Company, Inc., as initial Servicer (Incorporated herein by reference to Exhibit 10.1 to the Company'sCompany’s Form 8-K dated May 5, 2017) |
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| Purchase and Sale Agreement dated May 5, 2017, among Hill-Rom Company, Inc., as an originator and as servicer, other originators from time to time party hereto, as originators, and Hill-Rom Finance Company LLC, as Buyer (Incorporated herein by reference to Exhibit 10.2 to the Company'sCompany’s Form 8-K dated May 5, 2017) |
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| Performance Guaranty dated May 5, 2017, between Hill-Rom Holdings, Inc., the Bank of Tokyo-Mitsubishi UFJ, Ltd., as administrative agent, for and on behalf of the Credit Parties and other Secured Parties from time to time under the Loan and Security Agreement, dated as of the date hereof, among Hill-Rom Finance Company LLC, Hill-Rom Company, Inc., as initial servicer, the Administrative Agent and BTMU (Incorporated herein by reference to Exhibit 10.3 to the Company'sCompany’s Form 8-K dated May 5, 2017) |
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| Employment Agreement between HR Europe B.V.Hill-Rom Holdings, Inc. Employee Stock Purchase Plan, as amended and Francisco Canal Vegarestated as of July 1, 2017 (Incorporated herein by reference to Exhibit 10.110.22 to the Company's Form 10-Q10-K dated July 28, 2017)November 16, 2018) |
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| Form of Non-Qualified Stock Option Agreement for employees hired prior to August 1, 2016, under the Amended and Restated Hill-Rom Holdings, Inc.'s’s Stock Incentive Plan (Incorporated herein by reference to Exhibit 10.30 to the Company’s Form 10-K dated November 17, 2017) |
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| Form of Non-Qualified Stock Option Agreement for employees hired on and after August 1, 2016, under the Amended and Restated Hill-Rom Holdings, Inc.'s’s Stock Incentive Plan (Incorporated herein by reference to Exhibit 10.31 to the Company’s Form 10-K dated November 17, 2017) |
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| Form of Non-Qualified Stock Option Agreement (CEO version), under the Amended and Restated Hill-Rom Holdings, Inc.'s’s Stock Incentive Plan (Incorporated herein by reference to Exhibit 10.32 to the Company’s Form 10-K dated November 17, 2017) |
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| | | | | |
| Form of Restricted Stock Unit Award Agreement for employees hired prior to August 1, 2016, under the Amended and Restated Hill-Rom Holdings, Inc.'s’s Stock Incentive Plan (Incorporated herein by reference to Exhibit 10.33 to the Company’s Form 10-K dated November 17, 2017) |
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| Form of Restricted Stock Unit Award Agreement for employees hired on and after August 1, 2016, under the Amended and Restated Hill-Rom Holdings, Inc.'s’s Stock Incentive Plan (Incorporated herein by reference to Exhibit 10.34 to the Company’s Form 10-K dated November 17, 2017) |
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| Form of Restricted Stock Unit Award Agreement (CEO version), under the Amended and Restated Hill-Rom Holdings, Inc.'s’s Stock Incentive Plan |
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| (Incorporated herein by reference to Exhibit 10.35 to the Company’s Form 10-K dated November 17, 2017) |
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| Form of Performance-Based Restricted Stock Unit Award Agreement for employees hired prior to August 1, 2016, under the Amended and Restated Hill-Rom Holdings, Inc.'s’s Stock Incentive Plan (Incorporated herein by reference to Exhibit 10.36 to the Company’s Form 10-K dated November 17, 2017) |
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| Form of Performance-Based Restricted Stock Unit Award Agreement for employees hired on and after August 1, 2016, under the Amended and Restated Hill-Rom Holdings, Inc.'s’s Stock Incentive Plan (Incorporated herein by reference to Exhibit 10.37 to the Company’s Form 10-K dated November 17, 2017) |
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| Form of Performance-Based Restricted Stock Unit Award Agreement (CEO version), under the Amended and Restated Hill-Rom Holdings, Inc.'s’s Stock Incentive Plan (Incorporated herein by reference to Exhibit 10.38 to the Company’s Form 10-K dated November 17, 2017) |
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| Amendment No. 1 to Loan and Security Agreement, dated as of May 4, 2018, among Hill-Rom Company, Inc., as initial servicer, Hill-Rom Finance Company LLC, as borrower, and MUFG Bank, Ltd., (f/k/a The Bank of Tokyo-Mitsubishi UFJ, Ltd.), as Group Agent, as Committed Lender and as Administrative Agent (Incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated May 4, 2018) |
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| Amendment No. 1 to Purchase and Sale Agreement, dated as of May 4, 2018, among Hill-Rom Company, Inc., as initial servicer, each of the Originators party to the Purchase and Sale Agreement, as originators, and Hill-Rom Finance Company LLC, as buyer (Incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated May 4, 2018) |
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| Master Framework Agreement, dated as of May 4, 2018, by and among MUFG Bank, Ltd., as buyer, Hill-Rom Company, Inc., Hill-Rom Manufacturing, Inc., and each additional seller from time to time party thereto, as sellers, and Hill-Rom Company, as agent for the sellers (Incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K dated May 4, 2018) |
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| 1996 SIFMA Master Repurchase Agreement, including Annex I thereto, (as amended thereby), dated as of May 4, 2018, between Hill-Rom Company, Inc. and MUFG Bank, Ltd (Incorporated herein by reference to Exhibit 10.4 to the Company’s Form 8-K dated May 4, 2018) |
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| 1996 SIFMA Master Repurchase Agreement, including Annex I thereto, (as amended thereby), dated as of May 4, 2018, between Hill-Rom Manufacturing, Inc. and MUFG Bank, Ltd (Incorporated herein by reference to Exhibit 10.5 to the Company’s Form 8-K dated May 4, 2018) |
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| Guaranty, dated as of May 4, 2018, between Hill-Rom Holdings, Inc., and MUFG Bank, Ltd., as buyer under the Master Framework Agreement (Incorporated herein by reference to Exhibit 10.6 to the Company’s Form 8-K dated May 4, 2018) |
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| Amendment No. 3 to Loan and Security Agreement, dated as of May 3, 2019, among Hill-Rom Company, Inc., as initial servicer, Hill-Rom Finance Company LLC, as borrower, and MUFG Bank, Ltd., (f/k/a The Bank of Tokyo-Mitsubishi UFJ, Ltd.), as Group Agent, as Committed Lender and as Administrative Agent (Incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K dated May 3, 2019) |
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| | | | | |
| Amendment No. 1 to Master Framework Agreement, dated as of May 3, 2019, by and among MUFG Bank, Ltd., as buyer, Hill-Rom Company, Inc., Hill-Rom Manufacturing, Inc., and each additional seller from time to time party thereto, as sellers, and Hill-Rom Company, as agent for the sellers (Incorporated herein by reference to Exhibit 10.2 to the Company's Form 8-K dated May 3, 2019) |
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| Letter Agreement executed March 21, 2018 between Hill-Rom Holdings, Inc. and Richard M. Wagner (Incorporated herein by reference to Exhibit 10.1 filed with the Company's Form 8-K dated May 10, 2018) |
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| Amended and Restated Employment Agreement between Hill-Rom Holdings, Inc. and John P. Groetelaars dated November 16, 2018 (Incorporated herein by reference to Exhibit 10.43 to the Company's Form 10-K dated November 16, 2018) |
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| Amended and Restated Employment Agreement between Hill-Rom Holdings, Inc. and Deborah Rasin dated November 16, 2018 (Incorporated herein by reference to Exhibit 10.44 to the Company's Form 10-K dated November 16, 2018) |
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| Amended and Restated Change in Control Agreement between Hill-Rom Holdings, Inc. and John P. Groetelaars dated November 16, 2018 (Incorporated herein by reference to Exhibit 10.47 to the Company's Form 10-K dated November 16, 2018) |
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| Change in Control Agreement between Hill-Rom Holdings, Inc. and Barbara Bodem with an effective date of December 3, 2018 (Incorporated herein by reference to Exhibit 10.4 to the Company's Form 8-K dated November 27, 2018) |
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| Form of Amended and Restated Change in Control Agreement dated November 16, 2018, between Hill-Rom Holdings, Inc. and certain of its officers, including Messrs. Amy Dodrill, Mary Kay Ladone, Andreas Frank, Paul Johnson, Kenneth Meyers, Richard Wagner, and Ms. Deborah Rasin (Incorporated herein by reference to Exhibit 10.48 to the Company's Form 10-K dated November 16, 2018) |
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| Amended and Restated Employment Agreement between Hill-Rom Holdings, Inc. and Andreas Frank dated November 16, 2018 (Incorporated herein by reference to Exhibit 10.49 to the Company's Form 10-K dated November 16, 2018) |
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| Amended and Restated Employment Agreement between Hill-Rom Holdings, Inc. and Paul Johnson dated November 16, 2018 (Incorporated herein by reference to Exhibit 10.50 to the Company's Form 10-K dated November 16, 2018) |
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| Amended and Restated Employment Agreement between Hill-Rom Holdings, Inc. and Kenneth Meyers dated November 16, 2018 (Incorporated herein by reference to Exhibit 10.51 to the Company's Form 10-K dated November 16, 2018) |
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| Residential Lease Agreement between Hill-Rom Holdings, Inc. and Andreas Frank dated May 1, 2019 (Incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q dated August 2, 2019) |
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| Employment Agreement between Hill-Rom Holdings, Inc. and Mary Kay Ladone with an effective date of December 3, 2018 |
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| Employment Agreement between Hill-Rom Holdings, Inc. and Barbara Bodem with an effective date of December 3, 2018 (Incorporated herein by reference to Exhibit 10.3 to the Company's Form 8-K dated November 27, 2018) |
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| Employment Agreement between Hill-Rom Holdings, Inc. and Amy Dodrill with an effective date of June 1, 2019 |
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| Amendment No. 4 to Loan and Security Agreement, dated as of April 27, 2020, among Hill-Rom Company, Inc., as initial servicer, Hill-Rom Finance Company LLC, as borrower, and MUFG Bank, Ltd., (f/k/a The Bank of Tokyo-Mitsubishi UFJ, Ltd.), as Group Agent, as Committed Lender and as Administrative Agent (Incorporated herein by reference to Exhibit 10.1 filed with the Company's Form 8-K dated April 27, 2020) |
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| Amendment No. 2 to Master Framework Agreement, dated as of April 27, 2020, by and among MUFG Bank, Ltd., as buyer, Hill-Rom Company, Inc., Hill-Rom Manufacturing, Inc., and each additional seller from time to time party thereto, as sellers, and Hill-Rom Company, as agent for the sellers (Incorporated herein by reference to Exhibit 10.2 filed with the Company's Form 8-K dated April 27, 2020) |
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| Amendment No. 1 to Hill-Rom Company Master Repurchase Agreement, dated as of April 27, 2020, by and among MUFG Bank, Ltd., as buyer, and Hill-Rom Company, Inc., as seller (Incorporated herein by reference to Exhibit 10.3 filed with the Company's Form 8-K dated April 27, 2020) |
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| Amendment No. 1 to Hill-Rom Manufacturing Master Repurchase Agreement, dated as of April 27, 2020, by and among MUFG Bank, Ltd., as buyer, and Hill-Rom Manufacturing, Inc., as seller (Incorporated herein by reference to Exhibit 10.4 filed with the Company's Form 8-K dated April 27, 2020) |
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| Form of Addendum to Form of Limited Recapture Agreement between Hill-Rom Holdings, Inc. and certain of its officers, including Named Executive Officers |
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| Subsidiaries of the Registrant |
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| Consent of Independent Registered Public Accounting Firm |
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| Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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| Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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| 101.INS | Inline XBRL Instance Document |
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| 101.SCH | Inline XBRL Taxonomy Extension Schema Document |
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| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB | Inline XBRL Extension Labels Linkbase Document |
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| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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| 104 | Cover Page Interactive Data File (formatted as Inline XBRL document and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | | | | |
| HILL-ROM HOLDINGS, INC. |
| | |
| By: | /s/ John J. GreischP. Groetelaars |
| | John J. GreischP. Groetelaars |
| | President and Chief Executive Officer |
Date: November 17, 201713, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
| | | | | | | | | | | | | | |
| /s/ | William G. Dempsey | | /s/ | James R. Giertz |
| William G. Dempsey | | | James R. Giertz |
| Chair of the Board | | | Director |
| | | | |
| /s/ | John P. Groetelaars | | /s/ | William H. Kucheman |
| John P. Groetelaars | | | William H. Kucheman |
| President and Chief Executive Officer and Director | | | Director |
| (Principal Executive Officer) | | | |
| | | | |
| /s/ | Barbara W. Bodem | | /s/ | Ronald A. Malone |
| Barbara W. Bodem | | | Ronald A. Malone |
| Senior Vice President and Chief Financial Officer | | | Director |
| (Principal Financial Officer) | | | |
| | | | |
| /s/ | Richard M. Wagner | | /s/ | Gregory J. Moore |
| Richard M. Wagner | | | Gregory J. Moore |
| Vice President — Controller and | | | Director |
| Chief Accounting Officer | | | |
| (Principal Accounting Officer) | | | |
| | | | |
| /s/ | Gary L. Ellis | | /s/ | Nancy M. Schlichting |
| Gary L. Ellis | | | Nancy M. Schlichting |
| Director | | | Director |
| | | | |
| /s/ | Mary Garrett | | /s/ | Stacy Enxing Seng |
| Mary Garrett | | | Stacy Enxing Seng |
| Director | | | Director |
| | | | |
| /s/ | Rolf A. ClassonFelicia F. Norwood | | /s/ | James R. Giertz |
| Rolf A. ClassonFelicia F. Norwood | | | James R. Giertz |
| Chairman of the BoardDirector | | | Director |
| | | | |
/s/ | John J. Greisch | | /s/ | Charles E. Golden |
| John J. Greisch | | | Charles E. Golden |
| President and Chief Executive Officer and Director | | | Director |
| (Principal Executive Officer) | | | |
| | | | |
/s/ | Steven J. Strobel | | /s/ | William H. Kucheman |
| Steven J. Strobel | | | William H. Kucheman |
| Senior Vice President and Chief Financial Officer | | | Director |
| (Principal Financial Officer) | | | |
| | | | |
/s/ | Jason A. Richardson | | /s/ | Ronald A. Malone |
| Jason A. Richardson | | | Ronald A. Malone |
| Vice President — Controller and | | | Director |
| Chief Accounting Officer | | | |
| (Principal Accounting Officer) | | | |
| | | | |
/s/ | William G. Dempsey | | /s/ | Nancy M. Schlichting |
| William G. Dempsey | | | Nancy M. Schlichting |
| Director | | | Director |
| | | | |
/s/ | Gary L. Ellis | | /s/ | Stacy Enxing Seng |
| Gary L. Ellis | | | Stacy Enxing Seng |
| Director | | | Director |
| | | | |
/s/ | Mary Garrett | | | |
| Mary Garrett | | | |
| Director | | | |
| | | | |
Date: November 17, 201713, 2020
